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.

Which Trust Structure is Right For You? It Depends!

As the Baby Boomers begin to enter their golden years, there is a mini-explosion of interest in creating trusts as part of smart estate planning. But what kind of trust it right for your specific situation?

The answer is it depends on your specific situation so you should consult your attorney and financial adviser. But, in general, you should be familiar with the general types of trusts that can be created. The following information should help:

There are two basic types of trusts: living trusts and testamentary trusts. A living trust or an “inter-vivos” trust is set up during the person’s lifetime. A Testamentary trust is set up in a will and established only after the person’s death when the will goes into effect.

Living trusts can be either “revocable” or “irrevocable.”

Revocable trusts allow you to retain control of all the assets in the trust, and you are free to revoke or change the terms of the trust at any time.

With irrevocable trusts, the assets in it are no longer yours, and typically you can’t make changes without the beneficiary’s consent. But the appreciated assets in the irrevocable trust are NOT subject to estate taxes.

Within these two broad categories, there are many more complicated types of trusts, too, that apply to specific situations. Here are just a few:

Bypass trusts: These irrevocable trusts that are structured so the children will not have to pay estate taxes on those assets in excess of the current estate tax exemption.

Generation-skipping trusts: A generation-skipping trust (also called a dynasty trust) allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior – typically your grandchildren.

Qualified personal residence trusts: A qualified personal residence trust can remove the value of your home or vacation dwelling from your estate and is particularly useful if your home is likely to appreciate in value.

Irrevocable life insurance trusts: An irrevocable life insurance trust can remove your life insurance from your taxable estate, help pay estate costs, after you die and provide your beneficiaries with tax-free income.

What is a Trust, and Why Might You Need One?

You hear a lot these days about wills, estate and trusts. And while the vast majority of people have at least a general idea what an estate is and what a will is, precious few people have any real knowledge of what a trust is.

Let’s remedy that. Following are the basic features of a trust and info on how to decide if you need one.

A trust agreement is a legal document that spells out in details of how you want specific property (usually money, but not always just money) handled for specific people or purposes. The property is set aside in a special arrangement called being held “in trust”.

As the person setting aside the property, you are called the grantor, or more simply, the trust’s creator, and the person (or persons) that you designate to receive the property is called the beneficiary. As the creator, person or persons setting aside the property, you must decide the rules that you want followed for property held in the trust.

You must then appoint a trustee as the person who will make sure to administer the assets of the trust in accordance with these rules. Obviously, given the high level of responsibility, the trustee must not only be scrupulously honest, but also skilled, organized and a good communicator.

Common objectives for creating trusts are to reduce estate tax liability, to protect property in your estate, to help avoid family stress and strife over inheritance issues and to avoid probate.

That last one is especially important tin these litigious times. It is unfortunately not uncommon for probate disputes to linger for years in court, tying up assets and sapping untold amounts of dollars.

So, the first thing you need before setting up a trust is a clear idea of what purpose you want the trust to serve – that is, what exactly are you trying to achieve with the assets you want to put in trust. There are several different kinds of trust that serve different purposes, all with slightly different rules.

You should talk to a skilled professional to give you information on your options regarding trusts. Obviously, for specific legal advice or financial planning, you should turn to a licensed attorney, but independent experts like Kevin Quinn at Trustee Texas can be a great source of general information.

Kevin Quinn is CEO of Trustee Texas (, an independent trust administrator based in Dallas but operating statewide. For a free initial consultation on how he can help you with your trust, please contact him at (214) 578-2662.