Funding a Special Needs Trust for your Loved One

Senior Law News | Mar 24, 2021 | Shannon Laymon-Pecoraro, CELA

Many clients are concerned about how they will fund a special needs trust that has been established for the benefit of a loved one. The first step, however, is usually understanding the types of special needs trusts that are available, and which will be needed in your circumstance.

A Self-Settled Special Needs Trust is a trust that is established pursuant to federal law for the sole benefit of person with a disability under the age of 65, subject to a repayment to Medicaid upon the death of the beneficiary for the total amount of medical assistance provided to the beneficiary during his or her lifetime. Due to the Medicaid payback, these trusts are typically only funded with the assets of the beneficiary. Common funding sources include personal assets accumulated prior to onset of a disability, proceeds from a lawsuit, and outright distributions from gifts and inheritance. Additionally, these trusts may be funded with child support and Survivor Benefit Plan annuity payments.

To avoid the Medicaid payback, Third-Party Special Needs Trusts are used to hold gifts and inheritances of the beneficiary. It is important that assets for which the beneficiary has a vested interest not be deposited into this trust, or it will destroy the nature of the trust, subjecting it to an unintended Medicaid payback. With regard to funding, every family circumstance is unique, and as a result, there is no one-size-fits-all solution. Instead, we have to sit down with our clients to develop a comprehensive plan that balances the assets, goals, available benefits, and family dynamics. Usual funding options include the following:

  • Real Estate – Many families understand that their loved one may not be able to purchase their own residence, and that the family residence may be the only home they have ever known. To preserve housing stability, many of my clients choose to leave the family residence to the individual with a disability. The goal, however, is to ensure the trust owns the property and not the individual themselves. Although a primary residence is excluded from resource eligibility, by keeping the property in trust, it lessens the chance of exploitation, mismanagement and estate recovery.
  • Qualified Assets – As a result of the SECURE Act, which became effective in January 2020, many clients have started to increase the share of qualified assets, such as IRAs and 401ks, passing into a special needs trust for the benefit of a beneficiary with a disability or chronic illness. Prior to SECURE, and with proper planning, we could stretch required minimum distributions over the lifetime of the beneficiary; however, SECURE imposed a general 10-year withdrawal period, with few exceptions. One notable exception that was adopted was for persons with disabilities and chronic illness. Since these trust beneficiaries will be able to stretch their withdrawals, and are usually in a lower tax bracket, it often makes sense to minimize the tax impact to other beneficiaries of your estate by passing qualified assets to a third-party special needs trust.
  • Life Insurance – Although some clients have saved assets to fund a special needs trust, there are often concerns about future financial setbacks that may reduce the funds available at death. As a result, life insurance has become a common funding source because it provides comfort in knowing assets will be available despite financial setbacks, and also provides flexibility.

Ask the Attorney: I am preparing to turn 65 and my personal injury attorney is encouraging me to settle my case for less than what I feel I should. Do you have any insight on why he is pushing me to settle now?

I often partner with personal injury attorneys around the country to assess options that are available for their clients to maximize and protect the funds recovered in a lawsuit. What your attorney is concerned about is that you may not be able to protect as much of your money, even if you were to receive a bigger settlement later. This is because a special needs trust cannot be funded in Virginia after an individual has attained the age of 65.

If you receive your settlement prior to age 65, your entire settlement, net of attorney’s fees, costs and liens, can be put in a special needs trust and utilized for your benefit during your lifetime while also preserving means-tested public benefits such as Supplement Security Income (SSI) and Medicaid.  In the alternative, if you receive your settlement after age 65, you will have to “spenddown” your settlement before those same means-tested public benefits are available again. Even with advanced Medicaid planning strategies, unless a specific exemption applies, only a portion of the settlement can be protected, as opposed to the whole. Specifically, your settlement will need to be used to pay for care otherwise paid for by Medicaid and to supplement the income that may have been lost during any period of ineligibility. So, while you may believe you are settling your case for more money, you may actually receive less for personal use.

Ask Neo: I’ve got the spring fever!

Hook Law Center: Spring is officially here! After being cooped up in the house all winter, I am beginning to get “spring fever.” What is it about spring that just seems to increase my happiness?

Neo: Spring is considered at time of rebirth.  It is a time where flowers begin to bloom, days get longer, and the temperatures start to rise. It’s the time of year when we can start to participate in outdoor activities again. Matthew Keller, postdoctoral fellow at the Virginia Institute for Psychiatric and Behavioral Genetics in Richmond, found that the more time people spent outside on a sunny spring day the better their mood. While there are correlations between a person’s mood and the renewing energy provided by springtime activity, researchers continue to focus on the seasonal effect on moods, with a particular focus on wintertime depression termed seasonal affective disorder. What causes seasonal affective disorder remains a mystery, but there are distinct patterns of winter depression lifting in the spring.

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