Protect vulnerable loved ones with Special Needs Trusts

If you want to leave money or property to a loved one with a disability, you must plan carefully. Otherwise, you could jeopardize your loved one’s ability to receive Supplemental Security Income (SSI) and Medicaid benefits.

By setting up a “special needs trust” in your will, you can avoid some of these problems.

Owning a house, a car, furnishings, and normal personal effects does not affect eligibility for SSI or Medicaid. But other assets, including cash in the bank, will disqualify your loved one from benefits. For example, if you leave your loved one $10,000 in cash, that gift would disqualify your loved one from receiving SSI or Medicaid.

How a Special Needs Trust Can Help

A way around losing eligibility for SSI or Medicaid is to create what’s called a special needs or supplemental needs trust. Then, instead of leaving property directly to your loved one, you leave it to the special needs trust.

You also choose someone to serve as trustee, who will have complete discretion over the trust property and will be in charge of spending money on your loved one’s behalf. Since your loved one will have no control over the money, SSI and Medicaid administrators will ignore the trust property for program eligibility purposes. The trust ends when it is no longer needed — commonly, at the beneficiary’s death or when the trust funds have all been spent.

How Trust Funds Can Be Spent

The trustee cannot give money directly to your loved one — that could interfere with eligibility for SSI and Medicaid. But the trustee can spend trust assets to buy a wide variety of goods and services for your loved one. Special needs trust funds are commonly used to pay for personal care attendants, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles, and physical rehabilitation.

Using Trusts to Protect Retirement Funds You Want to Pass To Loved Ones

One of the many benefits of holding money in retirement accounts like IRA accounts or employer sponsored retirement plans, such as 401(k)s and 403(b)s) is that these funds are generally protected from creditors, even if the account owners declare bankruptcy.

But what about if those retirement assets are part of the assets left to survivors when the retirement account owner passes away? Are they still protected from creditors if the heirs declare bankruptcy?

According toe the U.S. Supreme Court, in a case called Clark v. Rameker, the answer is a resounding “NO!”

In a nutshell, the Court found that Heidi Heffron-Clark, who inherited an IRA from her mother in 2001 and filed for bankruptcy nine years later, could not shield the account from her creditors.

Since that June 2014 decision, many financial advisers, estate attorneys and other experts have encouraged clients to create trusts and name those trusts, rather than specific individuals, as inheritors of their IRAs. Those IRAs left to irrevocable trusts will have a greater chance of being protected from the claims of the new account owners’ creditors and also from the claims of creditors of the trust beneficiaries.

Using trusts can also provide other benefits, like enabling the inheritors to use the oldest beneficiary’s life expectancy to stretch out the tax-deferred growth of the funds held in the trust. They also let you control when beneficiaries are to receive distributions and can protect the assets from future lawsuits, irresponsible spending and divorce proceedings..

As always, you should consult with legal and financial professionals regarding the specifics of your situation, but it may make a whole lot of sense to set up a trust to protect the hard-earned retirement assets that you have accumulated and want to pass on to your loved ones.

Using Living Trusts to Avoid Probate

Most people agree that it’s wise to avoid going to probate court if at all possible.

Why? Because the probate process has become increasingly expensive and slow: It ties up property for months, often more than a year, and in some states, attorney and court fees can take up to 5% of an estate’s value.

Living trusts were invented specifically to allow people to avoid probate. The advantage of holding your property in trust is that after your death, the trust property is not part of your probate estate. (It is, however, counted as part of your estate for federal estate tax purposes.)

That’s because a trust — not you as an individual — owns the trust property. Property you transfer into a living trust before your death doesn’t go through probate. The successor trustee — the person you appoint to handle the trust after your death — simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.