Testamentary v. Free-Standing Special Needs Trusts

Testamentary v. Free-Standing Special Needs Trusts

Adding a child with special needs to your family can bring change and uncertainty to your life. You may contemplate what the future holds for your child and how to best plan for your child’s future. While you can never anticipate every need or contingency that your child may face in life, you may be able to address some of your child’s future needs by establishing a special needs trust for your child.

Understanding the Benefits of Special Needs Trusts

Creating a special needs trust creates a vehicle for third parties to set aside funds for your child with special needs without fear of your child becoming ineligible for the public benefits programs they need. For instance, other family members such as grandparents or adult siblings, may wish to gift funds to your child during their lifetimes or as bequests following their deaths. Parents also can direct assets to fund the trust after their death, such as life insurance policies or retirement accounts. A special needs trust gives them a place to put those assets for the benefit of the child.

Public benefits such as Social Security, Medicaid, and more may be crucial sources of financial support for your child throughout life, and the loss of those benefits could be catastrophic. A special needs trust has the advantage of preserving public benefits eligibility while enabling third parties to contribute funds to support your child’s other financial needs.

Furthermore, there is no requirement that you fund or set aside money in a special needs trust when you create it. A special needs trust can remain empty until a third party decides to contribute to it, or relatives pass away, and their estate plan directs some assets to fund the trust. On the other hand, there is no harm if no one ever ends up funding the special needs trust. Essentially, the special needs trust is an empty vessel that provides a mechanism for funds to benefit the child, without jeopardizing eligibility for public benefits, should anyone choose to provide those funds in the future.

Testamentary Special Needs Trusts

A testamentary trust is a trust that parents can establish through provisions in their wills or as a sub-trust of their living trusts. Those provisions typically state that certain assets will go into a special needs trust to be created to benefit a child, usually upon the child’s parents’ passing. In other words, the special needs trust does not exist until both parents pass away. In this case, someone, who is usually appointed executor of the most recently deceased parent’s estate or the trustee of their trust, must take steps to establish a new and separate special needs trust.

Testamentary special needs trusts may be necessary in certain limited circumstances. However, as explained in further detail below, they are typically not the preferred type of special needs trust for a child with special needs.

Free-Standing Special Needs Trusts

Instead of a testamentary special needs trust, parents can create a special needs trust for their child during their lifetime, also referred to as a “free-standing” special needs trust. When you establish a free-standing special needs trust, it goes into effect immediately, even though it is likely not funded and does not contain any assets. Unlike a testamentary trust, it is not tied to anyone’s death.  

As mentioned above, one benefit of this type of special needs trust is that it allows other family members, such as siblings, grandparents, aunts, uncles, and close family friends to contribute if they so choose.  They can name the trust as a beneficiary under their own wills or trusts or simply make gifts to the special needs trust during their lifetime.  This flexibility can allow the beneficiary of the trust to receive greater contributions from more family members other than just their parents.

It also is simpler and more cost-effective for a future trustee to administer one special needs trust rather than each family member being required to establish their own separate special needs trust for a loved one with a disability. It also can give peace of mind to the parents that they do not need to worry about other special needs trusts drafted by other relatives’ attorneys which may not be well-drafted and cause loss of benefits. Parents will have peace of mind knowing that public benefits programs are aware of their child’s special needs trust and already have evaluated and accepted it as valid.

Another benefit of a free-standing special needs trust is that the beneficiary does not have to wait for the creator’s death to benefit from the trust assets. Parents and other family members can begin contributing to the trust immediately, which, in turn, allows the beneficiary to access those funds more quickly if needed.

Parents and other relatives also can name a free-standing special needs trust for a loved one as a beneficiary on their accounts to receive the assets after their deaths. For instance, an extended family member may list a beneficiary to receive assets from retirement accounts and life insurance policies after you pass away. They can name a free-standing special needs trust as a beneficiary on those types of accounts. On other hand, if they named a testamentary special needs trust as a beneficiary on those accounts, the proceeds would only go to the special needs trust if both parents had already died prior to that relative’s death, which is often very unlikely. 

Furthermore, if a grandparent needs skilled nursing care, and the projected cost of that care is likely to wipe out more or the balance of their estate, a free-standing special needs trust can become a very valuable tool. Normally, there is a five year “look-back” period for any gifts someone makes before applying for Medicaid to pay for a skilled nursing facility. However, there is an exception which permits someone (often the parent or grandparent of the individual with disabilities) to gift all their assets, thereby reducing their estate below the generally applicable $2,000 Medicaid asset limitation without any look-back period whatsoever.  They can gift their assets to a properly drafted special needs trust that qualifies as a “Medicaid sole-benefit trust” under state law and Medicaid regulations and the very next day, they will qualify for Medicaid to pay for their skilled nursing care for the rest of their life. Again, unlike virtually all other gifts that will trigger a five-year look-back penalty period, the gift to the special needs trust is now exempt and available to benefit the special needs trust beneficiary during their lifetime. Additionally, remaining assets of the special needs trust upon the death of the individual with disabilities can stay in the family. 

Contact Us Today to Learn More About Our Legal Services

Rubin Law is the only Illinois law firm exclusively dedicated to providing compassionate legal services for children and adults with special needs. In addition, we offer unique legal and future planning techniques to meet your family’s individual needs. At our law firm, you can discuss all your needs and objectives with an experienced Illinois special needs trust lawyer.

Call us today at 866-TO-RUBIN or contact us online to learn more about the services we can offer you and your family.