Supplemental Needs Trusts for individuals with disabilities--"Testamentary SNT"

April 1, 2014

This edition of the Koldin Report E-Newsletter continues a series of newsletters on the use of Supplemental Needs Trusts for individuals with disabilities. A Supplemental Needs Trust provides that income and principal may be made available to the person with disabilities but only to supplement and not to replace government benefits. Federal and State legislation expressly exempts Supplemental Needs Trusts (Special Needs Trusts) from being considered available in determining eligibility for Medicaid or other government benefits provided that the Trust contains important language required by the law. In the previous issues, we reviewed how a person with disabilities could transfer his/her own savings and certain income to a First Party Supplemental Needs Trust and how others can make gifts to a Third Party Supplemental Needs Trust for the benefit of a person with disabilities.

All past issues are saved on our website can be found by clicking here. In this edition, we review how you can leave assets to a person with disabilities in a Supplemental Needs Trust through your Last Will and Testament or Living Trust. TESTAMENTARY SUPPLEMENTAL NEEDS TRUST A child (or grandchild) with disabilities is often excluded as a beneficiary in a parent's (or grandparent's) Will to avoid the loss of government benefits. Most government benefits, including Medicaid, have strict financial eligibility rules. If the income and/or life savings of a person with disabilities are higher than the eligibility levels, he/she will not be entitled to receive benefits. As part of your Estate Planning, you can now provide for your children or grandchildren with disabilities by establishing a Supplemental Needs Trust as part of the beneficiary provisions of your Last Will and Testament or as a beneficiary provision of your Revocable or Irrevocable Trust. This is commonly known as a "Testamentary Supplemental Needs Trust."

When you set up a Testamentary Supplemental Needs Trust for the benefit of a person with disabilities, you can designate whoever you want to inherit any balance remaining in the Trust after the person with disabilities dies. The following example illustrates how parents often disinherit their children with disabilities: Example: Tom and Mary Jones have 3 children, Jack, Jill, and Tracy. Jill has disabilities and receives government benefits. Tom and Mary currently have Wills that leave their entire estate to each other first and if the spouse is no longer living, they leave everything to Jack and Tracy. Jack and Tracy have promised Tom and Mary that they will make sure to use part of their inheritance to provide for Jill to supplement her government benefits. They disinherited Jill so that she won't lose her government benefits.

There are many problems with disinheriting children with disabilities and relying on other children to provide for them. Some examples include: (1) The other children might develop a poor relationship with the child who is disabled and stop providing for him/her. (2) The other children might have expenses of their own which they feel take priority over the needs of the person who is disabled because he/she is receiving government benefits. (3) The other children might have problems in their lives such as bankruptcy, divorce, illness, lawsuit, and death, which could cause them to lose the funds they were holding for the child with disabilities. (4) The other children could incur tax liabilities. Parents can now avoid these risks by leaving the share of their child with disabilities to a Testamentary Supplemental Needs Trust. The parents can designate who they want to be the Trustee(s) of the Trust and they can designate who they want to receive the remaining funds on the death of the person with disabilities. Grandparents who want to provide an inheritance for grandchildren no longer need to disinherit grandchildren with disabilities. They can leave the share of the grandchild with disabilities in a Testamentary Supplemental Needs Trust. Parents and Grandparents can also designate on the beneficiary clause of their life insurance policies and retirement accounts to leave the share of their child or grandchild with disabilities to the Testamentary Supplemental Needs Trust established in their Will or Living Trust.

Parents and grandparents should always review any tax implications with their accountant or financial planner. Younger parents who have not built up a large nest egg often worry about how they will provide for a child with disabilities if they die unexpectedly. The use of life insurance combined with a Testamentary Supplemental Needs Trust often provides an ideal solution. There are many factors to consider when deciding whether to establish a Testamentary Supplemental Needs Trust through your Last Will and Testament, Revocable Trust or Irrevocable Trust, or by establishing an immediate Third Party Supplemental Needs Trust. The Koldin Law Center is available to review the advantages and disadvantages of each of these options.