Setting Up a Special Needs Trust for a Disabled Relative

Many of us have a family member or close relative with a disability. We’d like to leave a portion of our estate to help this family member but are unsure how best to do this. Should we just make an outright gift? What about a trust? Let’s take a look at some of the options.

The simplest method of assisting the family member is an outright gift, either during lifetime or via our will. However, if the disabled individual is already receiving government benefits such as SSI (Supplemental Security Income) or Medicaid, additional assets could cause them to become disqualified from those programs. On the other hand, some programs such as SSDI (Social Security Disability Insurance) are not “means tested,” i.e., are not affected by the assets or income of the recipient.

Since a person may not need to receive “means-tested” benefits today but may require them in the future, the safest route is to leave them your gift inside a trust. The trustee of the trust will hold your money, invest it, and distribute it to your intended beneficiary as needed, without causing disqualification from government benefits.

Such a trust is called a Special Needs Trust or Supplemental Needs Trust, since it is designed to supplement—and not replace—government benefits. It can be created today and funded with money or other assets now. Such a trust is called an “inter vivos” trust. You can serve as the trustee or permit someone else to serve as trustee; the trust can be revocable or irrevocable; and you can retain power to change the ultimate distribution of the trust assets or not. All of these decisions affect the income tax and estate tax treatment of the trust. If you choose to make the trust irrevocable, then it will have its own federal tax i.d. number and can be set up to be taxed either to you, the trust itself, or to the beneficiary.

You can also set up the trust within your will, to be funded upon your death. Such a trust is called a “testamentary trust.” In this case, you will not have a separate trust document, since the terms of the trust will be contained within the will itself.

Because the rules of each state vary as to whether the terms of the trust will cause or not cause disqualification, you really must work with an experienced estate planning or elder law attorney to draft this trust for you. The attorney will be familiar with both the federal and state programs that might be of benefit at some point to your family member, what the rules are under both federal and state benefits laws, how trusts work, the different income and estate tax ramifications of each trust option, and how best to achieve your objectives.

Examples of distributions that will not cause the beneficiary to lose or have reduced government benefits:

• new car
• attorney/accounting services
• alternative health treatments
• TV, DVD player
• public transportation pass
• camera
• computer hardware, software, internet fees
• courses and classes
• dental work not covered by Medicaid
• fitness equipment
• musical instruments
• non-food grocery items
• physician specialists not covered by Medicaid
• utility bills
• physical therapy not covered by Medicaid
• vacations

The above is by no means an exhaustive list, but is only intended to give you some idea of what your gift via trust can be spent on to make your family member’s life so much better, without causing disqualification. As you can see, your gift will have wide-ranging benefits for your family member and will improve their quality of life for many years.

When is a Person Too Incapacitated to Sign a Will, Trust, or Power of Attorney?

As an elder law attorney I am frequently faced with adult children who realize that they simply have to take over for an aging parent. Maybe the parent is falling behind on bills or has trouble dealing with the medical establishment. It is always hard for a “child” to become the caretaker of the once-powerful and dominant parent.

Unfortunately, the parent may be reluctant to sign a power of attorney empowering the child to make legal decisions for the parent, since that act is frequently seen as an admission that the parent may actually need such help. Combine that with the child’s reluctance to bring up the subject for fear that it may anger the parent, and you have a recipe for procrastination. Hence the all-too-common situation where the attorney has to decide if a parent (or spouse) is too incapacitated legally to sign a will, trust, or power of attorney.

Let’s start with wills. Many people are surprised to find out that a person with Alzheimer’s or under a guardianship may still be legally competent to sign a will. That’s because under the laws of most states, a person is legally competent to sign a will if at the time of the signing he or she meets the following tests:

• knows the natural objects of his bounty (i.e., is aware of his spouse and children, if any)
• comprehends the kind and character of his property (i.e., knows approximately his net worth and what kind of assets he owns)
• understands the nature and effect of his act (i.e., realizes that it is indeed a will he is signing, and what that means)
• is able to make a disposition of his property according to a plan formed in his mind

Thus, the lawyer must meet with the parent or spouse and try to discern the above. In some cases, the lawyer may decide that the individual is too incapacitated and thus the lawyer must refuse to prepare a will.

A slightly different test is involved for signing a power of attorney. Here, the individual must be capable of understanding and appreciating the extent and effect of the document, just as if he or she were signing a contract. Thus, the parent may be competent to sign a power of attorney, but not competent to sign a will.

A trust is sometimes deemed to be more like a contract than a will, so that the necessary mental capacity needed to sign a trust may be less than that needed to sign a will. Recognizing that in today’s world living trusts are most often utilized as “will substitutes,” some recent state statutes have made the test for a trust the same as that set forth above for a will.

The mental capacity to sign the document should not be confused with the physical ability to sign one’s name. The law will permit a person to sign an “X” (known as a “mark”), that, so long as properly witnessed, will suffice just the same as a signature. In addition, if even a mark is not possible for the individual to make, then the individual can direct someone else to sign on his or her behalf.

Of course, the best advice is not to wait until it may be too late, but to have those conversations with family members while they are still competent and able to comprehend exactly what they’re signing and why.