Planning when you have a child with special needs requires a specific expertise. I sat down with a new client last week to review her old estate planning documents. Her will included a special needs trust for her young adult child with autism. The document was prepared by a prestigious firm, so I was shocked to find that the trust was completely wrong. It was prepared with a payback clause requiring payment to Medicaid upon her son’s death for services rendered to him. Reimbursement to the state is required for first-party special needs trusts—those funded with assets of the person with a disability. It is not necessary for a third-party trust such as this, funded by a parent or other loved one.
Planning Ahead Makes All the Difference
One of the biggest benefits of planning ahead and creating a special needs trust for your loved one is to avoid the need for such payback. This client had spent thousands of dollars on estate planning documents that gave away to the state money she could have otherwise passed on to her other children!
This case was especially egregious, but I regularly come across third-party trusts that are not correctly drafted. Often, they incorporate strict requirements that are applicable only to first-party trusts. The state closely regulates first-party special needs trusts, but third-party trusts have much more flexibility. Unfortunately, I often come across third-party trusts that muddy the waters by referencing the federal statute that exempts first-party trusts from being counted for Medicaid purposes. This is a problem because Medicaid and Social Security caseworkers generally don’t understand the difference between first- and third-party trusts. Having the first-party language just makes it more confusing and will inevitably lead to the trust being considered a first-party trust. Even worse, because the trust generally will not include each of the many requirements of a first-party trust (such as requiring notice to the state of all expenditures over $5,000), the beneficiary’s public benefits may be denied or terminated.
The Ins and Outs of a Special Needs Trust
Another common mistake is using a special needs trust when it isn’t beneficial or when it’s inappropriate. Inexperienced attorneys may think every individual with a disability requires a special needs trust. However, unless the beneficiary is, or is likely to be in the future, receiving means-tested benefits, they don’t need a special needs trust. A fully discretionary trust offers greater flexibility. And of course, some people with disabilities can manage their own assets, including inherited assets.
Attorneys who don’t draft special needs trusts regularly don’t appreciate how complex the rules for administering the trusts are. Without a solid grasp of public benefits, they will never be able to direct clients on when a distribution is considered income, whether rent should be charged, and how to determine whether the trust should pay for food and shelter for the beneficiary. If you’re going to spend your time and money on special needs planning, it is essential to ensure that your attorney has the relevant specialized knowledge.
If you have any questions about this post or any related matters, please feel free to email me at email@example.com.
About the Author
Shana Siegel, a Member of law firm Norris McLaughlin, P.A., and Chair of its Elder Care & Special Needs Law Practice Group, concentrates her practice in the area of elder law, focusing on representing seniors, individuals with special needs, and their families in connection with life care planning, public benefits, trust and estate planning, and long-term care advocacy. As one of the few Certified Elder Law Attorneys (CELA) in northern New Jersey to be certified by the National Elder Law Foundation (NELF), Shana has extensive experience in probate and estate administration, asset preservation, supplemental and special needs trusts, planning for disability, guardianship and estate litigation, resident rights, health care decision making, Medicare, Medicaid, and health insurance appeals. She has been involved in health and long-term care issues for over 25 years. A past president of the New Jersey Chapter of the National Academy of Elder Law Attorneys (NAELA), Shana has regularly met with legislators and government officials on behalf of the Elder Law Bar and their clients. In 2015, she was invited to join NAELA’s prestigious Council of Advanced Practitioners (CAP). Shana is a member of the New Jersey Women Lawyers Association, the State Bar Elder Law Section, the Life Care Planning Law Firms Association, and the Bergen and Essex County Bar Associations.