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 needs by establishing a special needs trust for your child.

Understanding the Benefits of Special Needs Trusts

Special needs trusts may allow you and other family members to set aside funds without fear of your child becoming ineligible for the public benefits programs they need. 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 could preserve public benefits eligibility while enabling you to contribute additional funds to support your child’s other financial needs.

Furthermore, funds and other assets gifted to or inherited by your child can cause them to loss their crucial government benefits and the options available to reinstate their government benefit eligibility generally trigger a requirement of a Medicaid “payback” provisions over the remaining assets after your child’s death. You may avoid these adverse implications by using what’s commonly referred to as a 3rd Party special needs trust to provide for your child financially.

Testamentary Special Needs Trusts

A testamentary trust is a trust that parents can establish through provisions in their wills or 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 must be used in certain circumstances, such as planning for a spouse who is disabled. However, they are generally not advisable for most families that have a child with disabilities.

Free-Standing Special Needs Trusts

Alternatively, 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. It is not created after a third party passes away or as a function of that person’s will or trust.

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 for a future trustee to administer and more cost-effective 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 later since all inheritance or gifts will go directly to a single free-standing special need trust the parents would be creating with a special needs planning attorney they trust.

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. For instance, the extended family 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, but if they named a testamentary special needs trust, it would only work 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 all their estate, a free-standing special needs trust can become a very valuable tool.  There is normally 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 $2000 Medicaid asset requirements without any look-back period whatsoever.  They can gift to a properly drafted special needs trust that qualifies as a “Medicaid sole-benefit trust” under state law and state Medicaid regulations and the next day 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 of their assets they had possessed the day prior are now exempt and available to benefit the special needs trust beneficiary during their lifetime.  In addition, remaining assets of the special needs trust upon the death of the individual with disabilities can stay in the family as well. 

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.