The Math Never Changes – Special Needs Trusts Add Up
Rob Wrubel CFP®, AIF®
My children went back to school about a month ago. My daughter with Down syndrome is now in fourth grade and participates in a typical classroom environment, with supports on the academic subjects. The focus so far has been on reading and she continues to make improvements.
My son, now in sixth grade, has started algebra questions in math. 7A – 4 = 10. What does A equal? Simple enough for those of us who have been doing it for some time and the basics of algebra have not changed since my time in middle school. I am still at least one step ahead on homework problems though I do not know how long my academic math skills will be superior to his.
Every so often, the book and teacher show an approach to solving the problems different than the ones I learned. The answers are the same; the process takes a different route.
The math of the special needs trust and planning for your special needs family member also adds up every time – even if the path your family takes looks a little different.
This week, I met with a woman and the team from a non-profit that provides her supports. The woman’s aunt passed away last year, leaving her some money. The aunt had not included any special needs provisions in her will and the money will eventually be paid to the adult woman with special needs. There is no way to know why the aunt did not establish a special needs trust. We only know she did not.
This woman is eligible to receive up to $698 of Supplemental Security Income (SSI) benefit in 2012 according to the Federal schedule. She also receives other support through Medicaid – including health insurance and some degree of supported living and employment services.
SSI alone is worth over $8,000 per year to a person receiving the Federal amount. A quick guess of basic medical and other services is another $10,000 benefit each year at a minimum. A person with significant needs might need close to that each month.
The inheritance this woman could receive is somewhere about $60,000 from her aunt’s estate. As readers of this newsletter know, a person with a qualifying disability must also meet the resource test to remain on benefits. The resource test is $2,000 per individual and $3,000 for a married couple. Above that, the ability to maintain benefits ends. The person with the benefits must either spend the amount over $2,000 within the month received or face losing benefits. The woman receiving the inheritance, with poor advice, would be forced to spend $60,000 in one month even if she did not have immediate spending needs.
The math is simple. What would you choose? $60,000 today or $18,000 per year for the next 20 years? The estimated government benefits, on a low to moderate size, are worth $360,000 over the next 20 years. $18,000 x 20 = $360,000.
The choice is not between taking the $60,000 or the potential $360,000 of benefits. A person with special needs can have both with a little planning. The cost of legal work may range from $2,000 to $5,000 for basic planning including the creation of a special needs trust. Now we are talking about spending $2,000 to create $420,000 of value – the $60,000 in kept inheritance + $360,000 potential benefits.
There are three types of special needs trusts that could have applied for the woman mentioned above.
The first is a Third-Party funded special needs trust. The aunt could have hired an attorney to draft her documents to specify that the money left to the woman with disabilities would go into a trust. The Third Party is the aunt. The person with special needs never actually receives the money. The trustee is appointed by the aunt and has full discretion on if and when disbursements are made on behalf of the beneficiary and who to hire to manage the money. This is generally considered the best option for everyone involved.
The second option is the First Party special needs trust. This happens when a person who otherwise qualifies for benefits receives money. In this case, the money came from the aunt. The person with special needs, or someone on her behalf, hires an attorney to draft the trust documents, then puts the money into the trust. The downside to this scenario is that Medicaid must be paid back with any funds remaining in the trust up to the amount of the costs of care supplied through Medicaid funded programs.
The third option is a pooled income trust. A pooled income trust acts like a first party trust. It provides a quick way to have money set aside that could prevent a person from receiving benefits. A pooled income trust differs from a first party trust in that the trustee is usually a sponsoring non-profit agency. In Colorado Springs, The Arc of the Pikes Peak Region sponsors a pooled income trust. There is another one in Denver. Most states have several options. The other significant difference is that any remaining funds stay with the pooled trust, to be used for administrative costs and to help other trust beneficiaries. The trusts most often are funded with smaller dollar amounts where the cost of legal work may not make sense.
An individual with special needs could have all three types of trusts, though it is uncommon. The Third Party trust gets created with good planning and most family assets are directed into this trust. Remaining excess income, Social Security back-pay, injury awards and more are usually directed to one of the other two types. The decision is dependent on circumstances.
Let the basic math work for your family. Take time to plan out your approach to creating and funding a special needs trust to create the future goals you have for your family.
Rob Wrubel CFP®, AIF®, is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Rob is also a father of a daughter with Down syndrome. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.719-632-0818