Diversity comes in many forms and many related ways of accommodating different needs. When parents are planning for the needs of children with disabilities, a product that should be considered in the parent’s will is the so-called special needs trust.

What kind of disability?

A disability can be defined in different ways for different programs, but to get a flavor for a “disability” relevant to estate planning for children who might benefit from a special needs trust (SNT), the Social Security Administration provides a starting point in the Code of Federal Regulations.

The applicable section defines a disability as the “inability to do any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” Code of Federal Regulation § 404.1505.

The term “substantial gainful activity” is further defined as work that both involves “doing significant and productive physical or mental duties” and is “done (or intended) for pay or profit.”

Federal, state program benefits

If a person meets the definition of “disability,” he or she may be eligible to receive various state and federal benefits.

Social Security can provide supplemental security income (SSI) for those individuals who have income and resources below prescribed limits (generally the resource limitation is less than $2,000).

SSI programs are often supplemented by state programs. In Washington, the Department of Social and Health Services (DSHS) supplements the benefits provided by SSI with additional benefits (including things like residential services). Also, an SSI recipient will qualify for Medicaid (health care) coverage which can be crucial to getting adequate and affordable healthcare for those with disabilities.

Taken together, the state and federal benefits can be quite robust and essential for the disabled child to maintain adequate services. Accordingly, the parent is well-advised to not create anything in his or her estate plan that might jeopardize the child’s receipt of those benefits.

Direct gifts to disabled children

Because of the strict restrictions on assets and income, if a parent were to create a will that gives assets directly to a disabled child at the parent’s death, that gift could well disqualify the child from state and federal aid programs.

So, direct giving to disabled children is usually quickly dismissed as a planning tool.

Standard trusts are inadequate

In a typical will, parents often establish trusts for their children. The typical trust is implemented to recognize that the child is too young or inexperienced to manage the inheritance all at once. So, the trust is established to provide basic support to the child (usually defined as basic health care, education, basic living and basic support).

The key here is that this trust for children is established for the purpose of providing basic support.

Often times, this trust ends at the age the parents have determined is appropriate for their child (maybe between 25-35 years old).

The problem with this kind of trust for a disabled child is that the “basic” support can become part of the countable assets/income for the disabled child just like direct gifts and thus can jeopardize or disqualify the disabled child from the means-tested programs identified above. 

Plus, the typical timeframe is too short to accommodate disabled people. How then can a parent provide additional support to their disabled child above and beyond that offered by state and federal programs?

How SNTs can help

In contrast to the basic support trust for children discussed above, the special needs trust has several notable differences.

First, the SNT is customarily set up to exist for the lifetime of the beneficiary. The length of the trust reflects the reality that the disability is expected to continue indefinitely.

Second, the SNT is set up specifically to preserve the child’s access to the state and federal benefits. This means that the trustee is usually granted complete discretion as to the distributions from the trust to the beneficiary.

This also means that the trust is not generally able to provide basic support. Instead, it provides supplemental support in addition to the support already available through the state and federal programs.

The kind of support envisioned by the SNT is that which enriches the disabled beneficiary’s life not otherwise provided by state and federal programs (think TVs, trips, salon visits, clothes shopping, etc.).

By establishing the SNT with these kinds of restrictions, it takes the money in the SNT out of the so-called “countable” resources available to the child according to the Social Security rules, thus preserving eligibility for the applicable state and federal programs.

Of course, there is no “one size fits all” approach.

Special needs planning is more nuanced than covered in this column. Be sure to work with a qualified attorney in planning for your disabled child.

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.