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Thinking Ahead: A Wise Approach to Special Needs Trusts

By Leslie Heffernen, JD, LLM (Tax), CPA - Managing Director of Fiduciary & Legal Services

 

January 16, 2024 - One of my standard questions for clients when drafting their estate-planning documents has been: “Do you have any special needs individuals in the family?” Today, I’m able to acknowledge how leading that question is. The more accurate question should be, “Since it’s common for a family member to have special needs such as autism, should we plan for this situation in your documents?”

According to data from the U.S. Census Bureau, there are approximately 13% of the civilian noninstitutionalized population (about 42.5 million Americans) with disabilities. This broad spectrum of data includes disabilities from the severe (those unable to perform activities of daily living) to the less severe (sensory or mobility issues that don’t impact activities of daily living).  

It's important to note that the Census Bureau figures don’t include those on the autism spectrum. According to estimates from the Centers for Disease Control, autism affects almost one-third of all children in the United States today, and those numbers appear to be rising.

Advantages

Many practitioners ask clients if there are any special needs individuals in the family when gathering the data necessary to draft an estate plan. What’s important though is that the special needs planning doesn’t end with the answer “no.” Unless there’s an extreme need in the present, such as to care for a child born with debilitating physical ailments, many advisors likely ignore the importance of setting up a special needs trust (SNT). But, that could be a mistake, particularly when planning for multi-generational wealth. When dealing with ultra-high-net-worth clients with multi-generational wealth, there’s a strong likelihood that, if not now then at some point in the future, there will be someone in the family with special needs. In my own work, I’ve found a growing number of clients who tell me they have a grandchild with special needs. For them, the current need may be apparent, but for others, drafting with flexibility will allow for the creation of an SNT at a future date. 

SNTs can provide numerous advantages for beneficiaries. The main objective is to support the beneficiary without jeopardizing their eligibility for public benefits such as Medical Assistance. The SNT’s assets can be used to pay for out-of-pocket expenses including, in part, travel, entertainment, pet care and other expenses that could improve the quality of life for the beneficiary. 

 

 

Future Need

There doesn’t have to be an immediate need in order to draft an SNT into a document. A client can create a multi-generational trust today and name the beneficiaries, some of whom may not yet be born. The trust may provide that in the event that a beneficiary is diagnosed with a special need then certain provisions will apply. This can ensure that the trust won’t hinder the receipt of public benefits. I typically see this type of language in testamentary trusts in which grandchildren are the beneficiaries.

Another method to allow for the future creation of an SNT, specifically for when the provisions of the trust are silent is to draft trust protector language into the document providing the protector with the power to create or carve out an SNT. A trust protector serves as an additional advocate for the beneficiary alongside the designated trustee. The protector’s role can be limited or broad enough that the provisions allow them to modify the trust as necessary to take into consideration a beneficiary’s special needs.

From time to time, I run into lawyers who don’t, and never have, drafted trust protector provisions into trusts. Nevertheless, this role has been available for decades. Based on my experience working with trusts situated throughout the United States, it seems that the use of trust protectors may also depend on the jurisdiction. If as an advisor, you find yourself working with an attorney who’s reluctant to draft a trust protector role it would be best that you ask questions. Keep in mind that a trust protector can also serve as a second set of eyes that can be particularly helpful when the beneficiary is still a minor. The protector can ensure that the minor beneficiary is properly clothed, their education is taken care of and that they’re going to a camp that can accommodate their needs.

Decanting an Irrevocable Trust

If the grantor of the trust made the individual with special needs the beneficiary of an irrevocable trust in which the trustee is required to make distributions of income or principal rather than qualifying the trust as an SNT, the beneficiary could be denied certain public benefits until the trust assets are spent down. But decanting may be an option to cure a non-SNT.

Decanting is a method in which a new trust is created by pouring the assets of the original trust into the new trust vehicle. The new trust would then have the provisions necessary to qualify the trust as an SNT. Although tax and other considerations should be researched prior to decanting, especially if the trust is generation-skipping, decanting can offer a solution. 

As I noted at the outset, special needs individuals may not exist in the current family structure but there’s a strong statistical probability that this may not be the case in the future. Careful and thoughtful drafting to provide flexibility within a trust should be considered and it should be part of any advisor’s multi-generational planning tool kit. 

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