An effective tool in estate planning is the use of a Special Needs Trust. Sometimes there is a child or beneficiary with a disability who is unable to receive an outright distribution, either due to their inability to manage the inheritance or due to the government benefits they are receiving. A Special Needs Trust is designed to supplement, but not replace, any government benefits they are receiving. It can provide money for the “extras” that the person may need.
Prior to the use of Special Needs Trusts, many parents and grandparents would leave a child out of their estate planning as they did not want to affect their government benefits. They would leave assets to another family member for the benefit of the disabled child; however, this was not always effective. The assets were not always spent for the benefit of the person in need. Through the use of a Special Needs Trust, a person no longer needs to rely on another family member to shelter these funds. They can be assured that the monies are in trust for the benefit of the disabled person.
There are several types of Special Needs Trusts. A “Third Party Special Needs Trust” allows a parent, grandparent or third party to leave an inheritance to a special needs person. They are able to designate who these funds will distribute to after the death of the special needs person. If proper planning is not done, however, some clients may receive an outright inheritance or a settlement, and need to shelter these funds so their government benefits are not jeopardized.
As a result of the Omnibus Budget and Reconciliation Act, an individual can place his or her own assets in their own Special Needs Trust. Two types of trusts are recognized and used in Michigan to shelter a beneficiary’s own assets. An “Exception A – Pay Back Trust” and an “Exception C – Charity Trust.” Both trusts are created with the individual’s own funds, and there is no penalty for this transfer. The beneficiary can use the funds during their lifetime to provide extras above and beyond what is provided by Medicaid or SSI.
With the “Exception A” trust, at the beneficiary’s death, any remaining funds must reimburse the State up to the amount of Medicaid assistance the person received. The “Exception C” trust allows for any remaining funds, at the death of the beneficiary, to be retained by a non-profit organization to assist other individuals with disabilities. Proper planning with a Medicaid or SSI applicant, or someone who wishes to leave to a disabled beneficiary, requires consideration of the use of some form of Special Needs Trust. Specific guidelines, provisions, and special language is required so that the funds are not treated as a countable asset to the applicant.
Burgess and Sweeney Law, P.C. continue to advise clients on estate planning, elder law, Medicaid planning, probate and trust administration, guardianships and conservatorships, business law, and real estate. As a result of the constantly changing laws in these areas, the information provided may change. We would be pleased to discuss this, or any other issues, in more detail.
