If you have a child with special needs, you have probably thought about what he or she will need after age 18 or when you die. Children with special needs may not follow the traditional path of moving out of the home and supporting themselves. They may need financial support from their parents as adults, even if they qualify for benefits like Medicaid and Social Security Disability Income. The best way to provide for your special needs child’s future is a supplemental needs trust.
A supplemental needs trust pays for recreation, travel and other extras
Because too much income or too much money in the bank will disqualify your child from government benefits, a supplemental needs trust states that it cannot be use for food, shelter, and necessities. The money is for extras like recreation, sports, music, travel, computers, cell phones and hobbies. You can fund a supplemental needs trust (sometimes called a “special needs trust”) in your will or as your child gets older, but it is also used often in divorce.
A way to provide for your special needs child in the future
A divorce agreement can spell out how much each parent will contribute to a supplemental needs trust, once the child gets too old for mandatory child support. Or maybe the parents will make a contribution when a certain event happens, such as the sale of the house. It is important to set up funds for your child’s future during a divorce, when you and your spouse start down separate financial paths. It is also a good time to update your wills and leave any inheritance for your special needs child to the supplemental needs trust. If you leave it to your child directly, it could disqualify him or her from Medicaid or SSDI, which pay for medical and residential care.
The trust needs a trustee, which can be either or both parents while they are alive. If the child lives with one parent, you may decide that person should be the trustee. You will also need to choose a successor trustee and a successor beneficiary. A successor trustee will manage the trust after your death. A successor beneficiary will inherit any money left in the trust fund after your child dies. It is legal for the successor trustee and successor beneficiary to be the same person. But if that is the case, you may want to pick a co-trustee to serve with the successor trustee to prevent a conflict of interest. In other words, the successor trustee could skimp on the needs of your child in order to get more when he or she inherits the money left in the trust.
Another option is a life insurance trust
Another form of supplemental needs trust can be set up with a life insurance policy. An irrevocable life insurance trust is funded with the payout from a life insurance policy. Sometimes a divorce agreement requires one or both parents to maintain life insurance so that the payout goes into either the supplemental needs trust (SNT) or the irrevocable life insurance trust (ILIT) when the parent or parents die. The added benefit to an ILIT is that the money is not part of your estate, so it is not subject to estate tax.
Divorce upends many of the plans people make for the future. When you divorce and you have a special needs child, you and your spouse need to make a new plan for his or her financial support. To set up a supplemental needs trust, consult with an experienced attorney and and someone knowledgeable about eligibility for Medicaid and Social Security Disability Income.