Financial Planning for Special Needs Children

Frequently Asked Questions About Special Needs Trusts

What are special needs trusts?

A trust is created when any property (real estate, finances, and/or tangible items) is managed by a person, called a trustee, for another person’s benefit, the beneficiary. Special needs trusts are made specifically for the benefit of disabled or mentally ill beneficiaries. The trust is created with the specific needs, lifestyle, and future of the beneficiary in mind.

What are the benefits of special needs trusts?

Special needs trusts can provide for a loved one’s needs while not interfering with their ability to collect government aid. Special needs trusts can also be used to set up inheritance funds or proceeds from a settlement on behalf of the disabled person. This way, if your loved one is the plaintiff in a successful lawsuit or inherits assets, those funds will go into the trust and will not disqualify him or her from receiving those government benefits. On the flip side, if the beneficiary is ever sued, the funds in his or her special needs trust are protected from any judgments.

Will a Special Needs Trust Affect a Loved One’s Ability to Receive Government Aid?

Special needs trusts could jeopardize your loved one’s ability to receive Supplemental Security Income (SSI) and Medicaid benefits if not planned carefully. Owning a house, a car, furnishings, and normal personal effects does not affect eligibility for SSI or Medicaid. But other assets, including cash in the bank, will disqualify your loved one from benefits. So setting up a special needs trust that does not exceed the asset limits for your loved one will ensure that their ability to receive government aid is not affected.

How Special Needs Trust Funds Can Be Spent?

The trustee does not give money directly to your loved one, but can spend trust assets to buy a wide variety of goods and services for your loved one. Special needs trusts can pay for personal care attendants, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles, and physical rehabilitation, all without affecting your loved one’s ability to receive government aid.

Will You Need a Lawyer?

Anyone can create a special needs trust, as long as the required language is included. You can create a special needs trust without an attorney. However, if you want to avoid any pitfalls of creating and funding the trust, an attorney will be invaluable. Having an attorney on your team will provide immense support when establishing your special needs trust. There are many legal requirements and details essential to the process, and a probate attorney will be able to provide you with services that are well worth the efforts for your loved one.

5 essential steps for setting up a special needs trust

Raising special needs children carries with it an added measure of consideration given not only to the emotional needs of your family, but to the ongoing elements of financial planning required. Special needs attorneys exist to help educate and smooth the path when taking on these responsibilities. Here are some of the most important tips to remember when considering financial planning for your special needs children:

1. Create A Letter of Intent
Gather thorough information about the life you and your family are providing. There will undoubtedly be unique elements to your daily routine that should be recorded. Write a detailed letter describing matters such as which doctors your child visits, medical history, their regular schedule of activities, and who you would like to be the legal guardian after you’re gone. A letter of intent is not a legally binding document, but it can give trustees and the courts a sense of which path you feel is best for your child. Update this letter once each year, and keep it with your essential family documents.

2. Draft a Special Needs Trust
Creating a Supplemental Special Needs Trust (SSNT) will be one of the most important steps in providing for the ongoing financial wellbeing of your child. Avoid the pitfall of putting savings or financial gifts into an account bearing your child’s name. By doing this, the ability for him or her to qualify for federal benefits like Medicaid or Supplemental Security Income (SSI) dramatically changes once listed assets reach $2,000 or more. A special needs trust allows you to allocate funds for your child’s future. Even if you don’t currently have the income to regularly direct into the trust, you can still designate the trust as a beneficiary of your estate and life insurance policy.

3. Bring Aboard A Special Care Planner
Many professionals are dedicated to assisting you with planning for the future care of your special needs child. Generating a game plan for the future needs of your child requires a vast knowledge of government benefit eligibility, federal laws, and the extensive matrix of legal documents you’ll need to become acquainted with. This can be a daunting task to add to your focused family energy. A special care planner, often a special needs attorney, is an essential resource to guide you through the steps to set up a future of comfort and care for your child.

4. File to become Legal Guardians
When your special needs child turns 18 or 21 (depending on the state), parents must file for legal guardianship through the courts. Legal guardianship gives the parents the legal right to continue to make decisions on behalf of their special needs child for housing, food, clothing, healthcare and beyond.

5. Write a Valid Will, Correctly
Parents of special needs children must have a valid will in place. Since the default for most states names each of your children as heirs to part of your state, remember, this could make your special needs child ineligible for federal aid. For this reason, both parents should draft wills to reflect that the special needs trust becomes the beneficiary of the portion of the estate allocated for the special needs child.

Can I Just Leave Money for a Sibling to Look After My Special Needs Child?

Instead of Creating a Special Needs Trust, Can I Just Leave Money for a Sibling to Look After My Special Needs Child?

Chris Johnson can help you establish a special needs trust for your loved one.

A special needs trust is for the benefit of a disabled child or adult who are unable to care for themselves financially and who have insufficient assets to pay for medical care or for the necessities of life. This kind of trust can provide for these needs while keeping your disabled child qualified for Medicare and Social Security Disability (SSI) benefits.

Instead of setting up a special needs trust, what if you decide to just pay funds to a sibling to look after your disabled child? By doing so, there is no guarantee that the funds you available to your sibling will all go towards your disabled child’s welfare.

Loss of Government Benefits

The law is very strict regarding eligibility for governmental benefits including Medicare and SSI. If your special needs child as an adult holds more than $2000 in assets, he or she will cease to qualify for SSI benefits. It also disqualifies your child for Medicaid and food stamps.

Establish a Special Needs Trust

A special needs trust is easy to create and will enable your child to receive the benefits that you provide and enjoy the governmental assistance he or she needs to live a quality life. A special needs trust is created pursuant to the Omnibus Budge and Reconciliation Act (OBRA-93), which includes:

• Language that the trust is intended to provide your child with supplemental care in addition to that provided by the government.
• Naming a trustee, which can be a family member or a financial professional or financial institution.
• Funding the trust through insurance proceeds, personal injury settlements, inheritances or any other type of asset.

Trusting a sibling to take care of your special needs child is an awesome responsibility that your sibling may initially embrace but may come later to regret or resent. Also, it is easy for your sibling to justify diverting funds for his or her own use or to consider it as an out-of-pocket expense incurred while caring for your disabled child.

Also, if you leave your child an inheritance and no trust is created, it can disqualify your disabled child from receiving governmental benefits instead of providing an extra benefit.

Common Medical Conditions With Special Needs

Special needs children can face medical, physical and logistical challenges that can endure far after their parents or guardians pass. If you’re a parent of a special needs child, what can you do to prevent future issues? How can you ensure your child obtains fair benefits from the government, manages his or her finances safely and stays away from potential threats—such as unscrupulous “business partners” and thieves?

Setting up a Special Needs Trust (SNT) is one effective solution. According to California law, this legal document protects the financial interests of those with physical or mental disabilities and helps them qualify for needed government benefits without having to “use up” other assets first.

Many conditions require special medical attention. Some, like epilepsy, may require constant vigilance, but medication and/or time can help control them. Others are life long. Those who suffer may require round the clock care or supervision. Below, we’ve listed three common medical conditions that create challenges for families along with strategic approaches they can use to handle financial planning issues:

1. Down syndrome. This genetic condition causes many cognitive and physical delays. Although adults with Down syndrome can mostly care for their daily needs and find employment, advanced financial planning can guarantee adequate living arrangements and support. Creating the right trusts and other estate planning structures can prevent a Down syndrome adult from being exploited financially and allow him or her to enjoy freedom to travel and pursue career goals.
2. Cerebral palsy. Brain injury or malformation that occurs before, during or after birth often causes cerebral palsy, which is the most common physical disability in children. Every case of this disease is unique. The financial care a child with CP needs depends on his or her condition. In addition to establishing a Special Needs Trust, you may want to speak with a qualified financial advisor and estate planning attorney to develop other strategies to protect the child’s future.
3. Autism and Asperger’s syndrome. Children who suffer from these conditions struggle to socially engage and find verbal and non-verbal communication difficult, although that description may oversimplify the care these individuals need. What causes these disorders is still a mystery, although recent research suggests that genetic predispositions, prenatal incidents and insulin resistance caused or worsened by certain dietary factors could contribute. Parents with children on the autism spectrum must monitor them closely and practice vigilant, patient care. From a financial planning perspective, you may need to establish controls regarding how and under what circumstances to transfer assets or control of financial instruments to your children to ensure that they are managed properly.

Tax Filing Requirements for a Special Needs Trust

The Trustee of a special needs trust will likely have to file an income tax return every year for the trust. Trusts generally are considered separate taxable entities for income tax purposes; however the forms and requirements will depend on the type of trust created.

Most special needs trusts will fall under the tax classification of “grantor trust.” These trusts are created for those benefiting from government programs such as Supplemental Security Income or Medicaid. All of the income, deductions and credits generated by the trust should be reflected on the personal income tax return of the individual with the disability. Some trustees obtain a separate taxpayer identification number for special needs trusts when it is established. If the trustee does not obtain a separate taxpayer identification number for the trust, the beneficiary’s social security number is reflected as the taxpayer identification number for the trust.

How to Use IRS Form 1041
Similar to IRS Form 1040 on which individuals report their annual income to the federal government, Form 1041 U.S. Income Tax Return for Estates and Trusts is the form on which most trustees and other fiduciaries report income to the federal government. In states where trusts are also subject to a separate state income tax, there is typically a state form on which estate and trust income needs to be reported. These forms differ from state to state, so if a trustee is unsure about whether a separate state return needs to be filed, and which form is to be used, the trustee should be sure to consult with an attorney who has familiarity with trust income taxation.

When must a Form 1041 be filed?
Since special needs trusts, regardless of type, must file an income tax return with the IRS every year, Form 1041 is due at the same time personal income tax returns are due — April 15th of the year following the year for which the income is being reported. It is possible to request an extension of time to file a Form 1041, but unlike the extension granted to individuals, only 5-month extensions are granted to trusts.

How does the trustee of a special needs trust complete Form 1041?
Every year, the Internal Revenue Service updates the Form 1041 (as it does for Form 1040) and issues instructions. The instructions are very detailed and helpful in navigating the completion of the Form 1041. These forms and instructions can be found on www.irs.gov.

Should a trustee hire an attorney to assist with filing Form 1041?
Unless the trustee specializes in the income taxation of trusts, it is prudent for the trustee to consult with or hire an experienced tax and/or estates and trusts attorney. Consulting with and hiring an experienced attorney ensures that all income is reported properly and no applicable or available deductions are lost or overlooked.

Are Special Needs Trusts Only for Minor Children?

You may generally think of a trust as only for your minor children, but a special needs trust can be created for any disabled individual regardless of age.

Special needs trusts are also used for adults.

Protect Your Child’s Eligibility

If your child has qualified for governmental benefits such as Social Security Disability (SSI), Medicare or food stamps, you can protect his or her eligibility for these benefits by creating a special needs trust.

Should your minor or adult child be receiving Medicaid, which is a joint state and federal program, he or she must have assets that fall below a certain level, usually $2000. Your state will consider any income being received by your child and the value of any assets in his or her name in considering eligibility.

By establishing a special needs trust, your child can receive additional funds but because he or she is restricted from access to the trust funds, the law considers these as not legally available and will not count them towards your child’s assets. Your trustee must also have sole discretion over the distribution of the funds and must only purchase goods and services on your child’s behalf instead of giving money to your child directly.

Inheritances and Personal Injury Awards

In cases of personal injury awards or inheritances, you can create a self-settled trust with funds owned by your disabled child such as from injury awards or inheritances. The child must be under 65 in this case and Medicaid must be paid back from the trust assets for any long-term care provided.

Nursing home care can also be benefitted in a qualified pool trust, a form of the self-settled trust. This trust is managed by a nonprofit organization although the funds remaining when your child passes away will reimburse Medicaid, though in some cases your attorney may be able to structure it so that some or all of the remaining funds can pass to surviving family members.

Funding the Trust

You can fund the trust while you are still alive or transfer funds to the trust upon your passing if the trust is the designated beneficiary. This is true for other benefits such as life insurance policies.

Other sources can be cash gifts, investment income, retirement plan benefits, personal property, real property and personal injury settlements. You should consider speaking to a trusts and estates attorney regarding the advantages and disadvantages of funding the trust through certain sources to avoid future problems.

Hire an Experienced Attorney

A special needs attorney and planner can help guide you through benefits like the State Children’s Health Insurance Program (SCHIP), Medicare, Medicaid, or Children with Special Health Care Needs (CSHCN). Contact the experienced special needs attorneys at Christopher B. Johnson Law today!