Create a Supplemental Needs Trust During Lifetime or in Will

If you have a family member with special needs or who is likely to need special care, you may wish to establish a supplemental needs trust for your loved one. Such trusts can be created during your life or established at your death.

First, a few trust terms:

• Grantor – The person who creates and funds the trust.
• Beneficiary – A person for whose benefit the trust is established.
• Trustee – A person or entity who manages the trust assets and administers the trust provisions.
• Revocable –The grantor can revoke or change the trust terms at any time.
• Irrevocable –The trust cannot be revoked or changed.
• “Inter vivos” – Latin term that means a trust established during the lifetime of the person creating the trust.
• Testamentary trust – included in a person’s Last Will and Testament.
• First-party special needs trust – established with funds that belong to the trust beneficiary who has a disability.
• Third-party supplemental needs trust –It is funded with assets that belong to a person other than the beneficiary.

A spouse who needs the care of a skilled nurse at home or in a nursing home may need Medicaid to pay for that long-term care. A child with special needs may receive or need to apply for benefits. To be eligible for benefits such as Medicaid or Supplemental Security Income, an unmarried person cannot have more than $2,000 in countable assets. This is why giving an adult child who currently receives certain benefits or leaving your estate outright to a spouse, child, or other family member who receives or is expected to need government benefits is a problem.

Instead, consider creating a supplemental needs trust for their benefit. A properly drafted trust will not count against the beneficiary’s eligibility for most needs-based government benefits. The trust can be the difference between having many supports and services and having none. A supplemental needs trust is intended to enhance the quality of life by supplementing the basic support a person receives from government sources, paying for goods and services such as clothing, entertainment, Internet, cell phone, travel, therapies, and care manager services.

A person who wishes to create a supplemental needs trust for a spouse typically does so by including the trust in their Will. In this case, the trust is not actually established and funded until the death of the spouse who made the Will. Pursuant to federal Medicaid law, a supplemental needs trust for a surviving spouse must be in a Will (not in a trust) and probated if that spouse requires Medicaid. A testamentary trust is also beneficial in that it saves your assets for your family. Upon the death of the beneficiary, the funds remaining in the trust will pass according to your Will. For example, if the trust was for your child, the remainder could pass to that child’s descendants, or to your other children.

A person or couple wishing to create a supplemental needs trust for a child with a disability or who has special needs may likewise do so by including the trust in their estate plan.

Alternatively, a person or couple can create an “inter vivos” supplemental needs trust for their child. This is still a third-party trust because it is funded with the parents’ assets. An even more specialized lifetime supplemental needs trust can have the additional benefit of reducing the gross estate of the parents, with the goal of reducing the federal estate tax that may be assessed at their deaths.

Another benefit of a third-party supplemental needs trust is that grandparents or other family members can contribute to it during their lives or leave part of their estate to the trust.

This is a specialized area of law. Supplemental needs trust planning should be undertaken by an attorney who practices special needs law or elder law.

Nothing contained in this publication should be considered as the rendering of legal advice to any person’s specific case but should be considered general information.