Avoid These 5 Special Needs Trust Pitfalls for a Valid Trust

Table of Contents

1. Introduction
2. The Importance of Setting Up a Special Needs Trust
3. Understanding Discretionary Distribution Language
4. The Role of Hem Standard
5. The Pitfalls of Hem Standard Language in California
6. The Need for Fully Discretionary Language in Special Needs Trusts
7. Supplementing vs. Supplanting Government Benefits
8. Medi-Cal Payback Provision: The Consequences
9. Understanding Third-Party Special Needs Trusts
10. The Role of Successor Trustee in Special Needs Trusts
11. Avoiding the Pitfall of Allowing the Beneficiary as Successor Trustee
12. The Problem with Testamentary Special Needs Trusts
13. The Importance of Standalone Special Needs Trusts
14. Conclusion

📚 Introduction

In today's video, we will be discussing some of the common pitfalls to avoid when setting up a special needs trust. As an estate planning attorney specializing in special needs planning, I have witnessed the negative consequences that can arise from improperly drafted trusts. It is crucial to understand the intricacies of special needs trusts to ensure the long-term financial security of your loved one with special needs. In this article, we will delve into various aspects of special needs trusts and shed light on the key pitfalls to watch out for.

🏦 The Importance of Setting Up a Special Needs Trust

When caring for a loved one with special needs, establishing a special needs trust provides essential financial protection. A special needs trust is specifically designed to preserve the beneficiary's eligibility for government benefits, such as Supplemental Security Income (SSI) and Medi-Cal. By holding assets in trust rather than in the beneficiary's name, it ensures that these valuable benefits remain intact. Additionally, a special needs trust allows for the utilization of trust funds to enhance the beneficiary's quality of life without jeopardizing their eligibility for public assistance programs.

💡 Understanding Discretionary Distribution Language

One of the key aspects to consider when setting up a special needs trust is the discretionary distribution language. This language dictates how the trust funds can be spent on behalf of the beneficiary. Traditionally, trusts include something known as the Hem Standard, which stands for health, education, maintenance, and support. While this language seems comprehensive, its inclusion in a California special needs trust can render the trust invalid for the purposes of public benefits.

❓ Why does the Hem Standard language invalidate the trust?

The Hem Standard language is considered countable assets for public benefits purposes. This means that if a special needs trust includes this language, the assets held in the trust will be seen as the beneficiary's own money. Consequently, if the beneficiary exceeds the allowable limit of $2,000 in countable assets, they may become disqualified from crucial benefits such as SSI and Medi-Cal. To preserve the trust's validity, it is vital to ensure that the discretionary distribution language allows for full and absolute discretion by the trustee.

➕ The Role of Hem Standard

While the Hem Standard language can prove problematic in a California special needs trust, it does serve a useful purpose in general estate planning. It allows for a wide range of expenditures that cater to the beneficiary's well-being and lifestyle. However, in the context of special needs planning, an alternative discretionary distribution language should be employed. This language grants the trustee unrestricted authority to utilize the trust funds for any purpose they deem fit, without categorizing the expenditures as health, education, maintenance, or support.

❗ Pros: The Hem Standard language provides comprehensive guidance for distributions from a trust in general estate planning.

❗ Cons: In a special needs trust, the Hem Standard language can render the trust invalid for public benefits purposes.

⚖️ Supplementing vs. Supplanting Government Benefits

Another crucial consideration when drafting a special needs trust is the distinction between supplementing and supplanting government benefits. The trust should clearly state that its assets are meant to supplement, not replace, any benefits the beneficiary is already receiving from government programs such as Medi-Cal. This means that the trust funds should be used to enhance the beneficiary's quality of life beyond what is offered by government assistance, rather than directly covering the same expenses already covered by these programs.

💭 Example: If the beneficiary requires specialized treatment that is not covered by Medi-Cal, the trust funds can be used to pay for that treatment. However, the trust should not be used to cover Medi-Cal payments that the beneficiary would have received anyway.

This distinction is essential to ensure the trust remains valid and does not impact the beneficiary's eligibility for public benefits.

📜 Medi-Cal Payback Provision: The Consequences

When it comes to third-party special needs trusts, it is crucial to avoid the inclusion of a Medi-Cal payback provision. Third-party special needs trusts are typically set up by someone other than the beneficiary, such as a parent or grandparent, who wishes to provide financial support for the beneficiary's lifetime. In these trusts, upon the beneficiary's death, the remaining funds are distributed according to the trust's instructions, and Medi-Cal does not have the right to claim reimbursement.

❌ Including a Medi-Cal payback provision in a third-party special needs trust can have severe consequences. This provision would allow Medi-Cal to reclaim the funds remaining in the trust upon the beneficiary's death. It is important to clarify that only first-party special needs trusts, established with the beneficiary's own money, are subject to a Medi-Cal payback provision.

💭 Note: It is crucial to consult with a knowledgeable attorney to ensure your special needs trust is drafted correctly and does not include provisions that could harm your loved one's financial well-being.

📝 Understanding Third-Party Special Needs Trusts

Third-party special needs trusts are a common choice for families looking to provide financial support for their loved ones with special needs. These trusts are typically created by someone other than the beneficiary and are funded with assets belonging to the third party, such as a parent or grandparent. The trustee of the third-party special needs trust is responsible for managing the trust assets and making distributions for the beneficiary's benefit.

💡 Key Point: It is imperative to ensure that the beneficiary is not listed as the successor trustee or otherwise granted direct access to the trust funds. This is crucial to maintain the trust's validity as a non-countable resource and preserve the beneficiary's eligibility for government benefits.

❗ Avoiding the Pitfall of Allowing the Beneficiary as Successor Trustee

One critical pitfall to avoid in special needs planning is the inclusion of the disabled beneficiary as a successor trustee of their special needs trust. To maintain the trust's validity and ensure it is considered a non-countable resource, it is crucial to prevent the beneficiary from having direct access to the trust funds. If the beneficiary can become the successor trustee, the trust may be seen as invalid by government agencies responsible for determining eligibility for benefits.

💭 Note: Make sure your special needs trust includes explicit language stating that the beneficiary is not permitted to act as trustee, regardless of any other provisions within the trust.

⛔ The Problem with Testamentary Special Needs Trusts

Some families mistakenly believe that embedding special needs trust language within a revocable trust is sufficient for protecting their loved one with special needs. However, this approach can lead to issues, primarily when it comes to testamentary special needs trusts. Testamentary special needs trusts only come into effect upon the death of both parents or the sole surviving parent. This can create problems if other family members, such as grandparents, wish to leave assets to the beneficiary in their estate plans.

💭 Tip: To ensure maximum flexibility and immediate funding opportunities, it is advisable to create a standalone special needs trust. This type of trust can be established and funded independently from other estate planning documents.

🔚 Conclusion

Creating a valid and effective special needs trust is essential in securing the financial future of your loved one with special needs. By understanding and avoiding common pitfalls, you can ensure that the trust serves its intended purpose of enhancing the beneficiary's quality of life without jeopardizing their eligibility for public benefits. Remember, consulting with an experienced special needs attorney is crucial to navigate the complexities of special needs planning and draft a trust that meets your family's unique needs.

Please note that this article is for informational purposes only and should not be considered legal advice. Consult with an attorney specializing in special needs planning for personalized guidance.

Highlights

• Setting up a special needs trust is crucial for protecting the financial future of your loved one with special needs.
• Including the Hem Standard language in a California special needs trust can invalidate the trust for public benefits purposes.
• A fully discretionary language in special needs trusts allows the trustee to make distributions according to their discretion.
• Special needs trusts should supplement, not supplant, government benefits to ensure the beneficiary's eligibility for assistance programs.
• Medi-Cal payback provisions are applicable only to first-party special needs trusts and should be avoided in third-party trusts.
• Allowing the beneficiary to act as a successor trustee can jeopardize the trust's validity as a non-countable resource.
• Creating a standalone special needs trust offers greater flexibility and immediate funding opportunities compared to testamentary special needs trusts.

FAQ

Q: Can I use a regular estate planning attorney to draft a special needs trust? A: While regular estate planning attorneys may have knowledge of trusts, it is advisable to work with an attorney specializing in special needs planning. They understand the unique laws and requirements surrounding special needs trusts and can ensure that your trust is valid and effective.

Q: What happens if the special needs trust runs out of funds? A: If the special needs trust is properly structured, it can be funded throughout the beneficiary's lifetime. However, in the event that the trust becomes depleted, the beneficiary's eligibility for government benefits may be affected. It is essential to plan and manage the trust funds carefully to ensure ongoing financial support.

Q: Are there any restrictions on how the trust funds can be used? A: While special needs trusts offer flexibility in funding the beneficiary's needs, there are certain limitations. The funds should be used for expenses that enhance the beneficiary's quality of life and are not covered by government assistance programs. Careful consideration should be given to ensure that the trust funds are used appropriately and in compliance with regulations.

Q: Can I modify the terms of a special needs trust? A: In some cases, the terms of a special needs trust can be modified. However, any modifications must comply with applicable laws and regulations. It is advisable to consult with an attorney specializing in special needs planning to ensure that any changes to the trust are legally valid and do not negatively impact the beneficiary's eligibility for benefits.

Q: How often should I review and update my special needs trust? A: It is important to review and update your special needs trust periodically, especially if there are significant changes in your family's circumstances or the beneficiary's needs. This can include changes in financial resources, government benefit programs, or the beneficiary's medical condition. Regularly consulting with an attorney can ensure that your trust remains valid and meets your family's evolving needs.