Understanding Special Needs Trusts, 0214 RIBJ, 62 RI Bar J., No. 4, Pg. 31

AuthorChad E. Nelson, Esq.

Understanding Special Needs Trusts

Vol. 62 No. 4 Pg. 31

Rhode Island Bar Journal

February, 2014

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 January, 2014

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 THE LAW OFFICES OF JEREMY W. HOWE, LTD.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 Chad E. Nelson, Esq.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Special needs trusts are essential planning vehicles, not only for disabled persons, but also for their family members and caretakers. This article explains the basics of how and why special needs trusts are utilized, both for the practitioner and the client. In addition to reviewing the different types of special needs trusts and their unique functions, we will also look at some of the dangers of improper estate planning stemming from the absence of special needs trusts, as well as some of the pitfalls involved in the erroneous creation and use of special needs trusts.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Why create a special needs trust?

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0From a life-planning standpoint, special needs trusts afford parents and other family members of disabled persons the opportunity to provide the desired level of control over financial assets or other property held for the benefit of the disabled person. The trustee of a special needs trust is given a limited amount of discretion regarding how the trust assets are administered for the disabled individual’s benefit in accordance with the wishes of the person creating the trust, generally a parent, grandparent or sibling. Instead of lifetime gifting or leaving property upon death to a disabled individual, the trust becomes the proper receptacle for all such property transfers. Designating the trust as the owner of such property also helps to avoid any potential creditor issues the disabled person might have exposure to, eliminating possible spendthrift concerns.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0From an estate planning standpoint, special needs trusts serve as a valuable protector of the benefits received from means-tested government programs the disabled person currently receives or may be eligible for in the future. Leaving money and/or property outright to a disabled person is likely to disqualify the individual from such programs or risks preventing the individual from qualifying for such programs in the future. By designating the individual’s special needs trust as the recipient of property intended for the disabled individual, these assets are removed from the individual’s countable asset tally. Assets held in a special needs trust are limited to use for the supplemental needs of the disabled person, meaning they are only to be used for those purposes not currently provided by any government program. In other words, the trust holds assets for the benefit of the disabled person to provide him or her with the extras in life, not to supplant already existing services received via a government program.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Choosing the right kind of special needs trust.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0It is important to note the distinction between the two main types of special needs trusts on an individual planning basis: 1) the D4A Trust (also known as the First Party Trust, or the Medicaid Payback Trust); and 2) the Supplemental Needs Trust (also known as the Third Party Trust). Throughout the article, the two types of special needs trusts are referred to using these various terms interchangeably. For the practitioner, it is important to read and hear the varying terms...

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