Articles Posted in Special Needs Trusts

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When it comes to estate planning, families with special needs children need to take extra care to prepare for when you will no longer be around to care for your child. As part of an estate plan designed to help enhance and enrich your child’s life both in the present and into the future, you may want to consider a Special Needs Trust.

A Special Needs Trust allows individuals with disabilities to receive funds needed to supplement their benefits, have a greater quality of life, and cover unexpected expenses without losing their benefits. This can be created for someone with physical and mental disabilities and/or with mental illness. There are three different types of Special Needs Trusts that can be created, and they differ in who creates the trust, who is trustee, and what happens to the remaining assets in the trust after the death of the beneficiary.

Unfortunately, people often lose their SSI, Medicaid, or other benefits after inheriting life insurance, real estate, or other assets. Special needs planning works to prevent this from happening and to preserve these benefits. It also can be used to provide lifetime money management for benefit of the disabled child, protect eligibility for public benefits, and ensure a pool of funds if public funding ever ceases or is restricted.

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During the COVID-19 pandemic, many of us in Illinois are complying with the governor’s stay-at-home order. We are hunkered down in our homes – making only necessary trips for essential matters such as medical treatment, supplies, or perhaps taking a walk to breathe in in some fresh air and soak in some sunshine while maintaining social distancing. We thank and applaud everyone who is doing their part in curbing the spread of this virus.

At this time, some of you may reflect on the “what ifs” of the future. What will happen if you become incapacitated, or worse, if you pass? What if your child has special needs and you wish to preserve assets for the benefit of your child? What if you have minor children? How or who will take care of them and assets for their benefit should you be unable to care for them, or worse, die? Are you able to make or coordinate health care and financial decisions for your spouse, parent or other elder loved one?

Illinois law provides defaults for distributions through probate court proceedings if you were to pass away and a legal process (namely, guardianship) should you become incapacitated. Depending on Illinois law could involve what could be costly court proceedings. Ultimately, the result of the Illinois laws may not reflect your wishes as to the disposition of your assets and/or who will be in charge. A properly executed estate plan sets out your wishes and names the trusted persons you want in charge of your affairs during life and afterward. Estate plan documents can and often include wills, powers of attorney, living wills, and trust documents – such as living trusts, special needs trusts, or asset protection trusts.

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Open enrollment for Medicare runs from October 15th to December 7th this year. If you are eligible for Medicare, you are more likely than ever to be the target of Medicare related scams this year. Medicare scammers are smart and they know exactly what types of scenarios, incentives and stories are most likely to ensnare seniors.

Typical scam calls may be about a refund of premiums, the need for a new Medicare card, false offers of free medical services and bogus Medigap plans. No matter the story used, service offered, or purported identity of the caller, the objective is for the scammer to obtain the senior’s Social Security number by slowly extracting as much personal information as possible from their victim.

Here are some important things for seniors to remember about Medicare to help weed out fake callers:

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No area of our practice causes more confusion and angst for seniors and their families as the question of how to pay for nursing home care. Within that practice area, no topic causes more problems for seniors as asset protection planning. Myths abound about how to protect assets prior to applying for Medicaid. Some of the most common are: 1) that a Medicaid applicant can transfer $14,000 per child per year; 2) that the kids can be added to financial accounts to shield assets; or 3) that investing in annuities will solve all their problems. In fact all of these theories about asset protection are wrong. Worst of all, engaging in these activities can leave the senior in an incredibly precarious position.

The $14,000 per child myth is based on IRS gifting rules which have no relationship to Medicaid eligibility or planning; adding your children to your account will have no effect on how Medicaid counts the assets when determining your eligibility for benefits; and the rules concerning Medicaid and annuities has changed dramatically over the years to that point that only one, very specific type of annuity will help a Medicaid applicant qualify for benefits while preserving assets.

Even playing by all the rules can created problems. For example, current Medicaid rules will not take into account any transaction that occurred more than five years before the application for benefits. This leads many seniors to transfer their assets to children well in advance of applying for Medicaid benefits.  Unfortunately this creates a whole new set of problems. Assets transferred to children are now vulnerable to the creditors and spouses of the kids. There can also be serious capital gains and real estate tax implications for transferring property to children that must be taken into account.

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Many clients ask, ” Do we have to sell their loved one’s house when she enters a nursing home?”  Our response is usually, “Not necessarily”.

One of the ways to avoid a sale, is to use the Five Year Plan when doing Medicaid Planning.  This strategy entails the transfer of the house at least 5 years before the loved one files for Medicaid. The transfer does not need to be disclosed since it was transferred before the Medicaid look back period of 5 years begins.  For example, if the parent’s house is transferred to the kids or other transferee on September 1, 2017 and that parent does not file a Medicaid application until October 1, 2022, then the house is clear of any Medicaid forced sale.

Another strategy is to transfer the house to a person with a disability or that person’s Special Needs Trust.  This can be done at any time-even within the 5 year look back period.  The person with a disability is usually someone who has been declared disabled under the Social Security regulations.

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One of the most important, but most often overlooked estate planning documents, are the Powers of Attorney. Powers of Attorney fall into one of two categories: (1) Powers of Attorney for Property and (2) Powers of Attorney for Health Care. Essentially a Power of Attorney legally authorizes a trusted family member or friend to make decisions on your behalf in the event that you become incapacitated or are unable to make decisions on your own. Powers of Attorney are powerful documents that can protect you and your family from the need for expensive guardianship proceedings.

Although Powers of Attorney for Health Care are regularly accepted by hospitals and doctors, many banks and financial institutions are making it harder and harder to use a legally valid Power of Attorney Document. If a manager at your financial institution believes, in good faith, that your Power of Attorney is no longer valid you may be left with no choice but to petition a court for guardianship.

To avoid this from happening we advise that you review your Powers of Attorney to ensure (1) the your Power of Attorney documents are up to date and include the most recent statutory language; (2) that your Powers of Attorney are no more than 5 years old; and (3) that your Power of Attorney allow sufficient authority for your agent to amend trust documents, make gifts, and designate or change beneficiaries.

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In a time when advances in medicine are providing longer, more fulfilling lives for our family members with special needs, it is more important than ever to take advantage of all the financial planning tools available for their specific needs.

The Illinois ABLE Act provides for a new tax-advantaged investment program that allows a blind or disabled person (or their family) to save for disability related expenses without jeopardizing the disabled individuals means tested federal benefits. Unlike the assets of a traditional Special Needs Trust, ABLE account assets can and should be spent on expenses related to the family member’s disability. These expenses include education, housing, transportation, employment training, assistive technology, personal support services, health, prevention and wellness, financial management, legal fees, and funeral/burial expenses.

A properly established ABLE account will allow a disabled individual to save up to $100,000 in their own name. The disabled person or their family may contribute up to $14,000 per year into the ABLE account without effecting eligibility for SSI or other federal means tested programs. Although the Illinois State Treasurer’s Office is responsible for administering the ABLE program, the funds are privately held assets that are totally controlled by the account holder.

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A Special Needs Trust (“SNT”) or Supplemental Needs Trust is a certain type of trust which can be used for goods and services that governmental programs will not cover.  The SNT must have special language within the trust such as: “This trust shall be used to supplement and not supplant governmental programs”.  Having such necessary language, the assets in the trust are not counted against the special needs beneficiary as an asset in determining eligibility for governmental programs such as Medicaid and Supplemental Security Income (SSI).

There are two types of SNTs.  The First Party SNT is funded with the special needs person’s own funds.  For instance, if a person with a disability is awarded monies from a settlement from an auto -mobile accident, those funds can be placed in a First Party SNT to preserve the eligibility for SSI and/or Medicaid.  The same process can be used for when a special needs person inherits a sum of money outright.

There is one disadvantage with the First Party SNT.  When the beneficiary dies, Medicaid will send a bill to the Trust for the monies spent by that program during her life.  The trust must pay back Medicaid the amount of the bill. However, if the trust assets are less than the Medicaid charge, Medicaid will absorb the balance of its bill.  If there is a balance after paying the Medicaid bill, the proceeds may be distributed to family or anyone who is a distributee of the Trust.

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