Tuesday, October 6th, 2015

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Getting the Most for Those Who Need It Most

Amidst rising healthcare costs and rigid public-aid requirements, special-needs trusts can enrich the lives of your disabled loved ones. Here’s the lowdown on what you need to know.

The facts and figures are staggering: nearly 54-million people in America cope with special needs and the rising expenses related to some form of disability—whether cognitive, developmental or physical—according to the National Organization on Disability. The rise in cases of certain disabilities may be on the verge of creating a national health crisis. Autism, for one, drains the economy of  $35 billion a year according to a recent Harvard School of Public Health study. The Harvard research also indicates that the lifelong bill for one autistic individual, from birth until death, could reach as much as $3.2 million. What’s more, individuals with special needs relying on government assistance alone—such as Medicaid and Supplemental Security Income—often live near the poverty level in the absence of additional income from their family, community or other loved ones.

Despite these alarming numbers, once a disability is diagnosed, early planning helps families add to and protect the assets of a special-needs individual, preventing the loss of critical benefits. One effective way to protect a loved one is through a special-needs trust. “It’s the most popular planning tool,” according to Vincent J. Russo, cofounder of the Academy of Special Needs Planners and a special-needs estate attorney.

To Preserve and Protect

Special-needs trusts were created to manage resources while protecting an individual’s eligibility for vital public assistance. Establishing an SNT may also prevent court intervention by eliminating the need to appoint a guardian to manage the disabled individual’s assets. SNTs are designed to pay for items—such as education, alternative therapies, counseling and vacations—which go beyond the simple life expenses covered by government benefits.

There are two basic types of SNTs: the third-party special-needs trust and the first-party special-needs trust. Third-party SNTs commonly are created by a parent or other family member for a child with special needs—though the child may be an adult when the trust is created or funded. These SNTs require no government paybacks and allow the beneficiary to receive gifts, lawsuit settlements or other funds without losing their eligibility for certain government programs.

Page Two: Where to turn for help


When the disabled individual establishes the trust for himself, it is referred to as a first-party or self-settled SNT. These SNTs permit the disabled person to protect his or her assets from creditors and can help to reduce total assets for tax or Medicaid planning purposes. Three types of first-party trusts exist. Pay-back trusts are available for disabled individuals under age 65 and require payback for government assistance upon the death of the disabled individual. Secondly, qualified-income trusts are funded solely by an individual’s income—such as a pension or social security. They have no age or disability restrictions, but require government paybacks. Lastly, not-for-profit pooled trusts have no age or government payback requirements if the amounts remaining at the disabled beneficiary’s death remain in the trust for the benefit of other disabled beneficiaries.

One very important fact to remember: it is critical to plan for the SNT before the disabled individual receives assets in his or her own name. Many parents incorrectly assume that their children qualify for government benefits simply because they are disabled. The eligibility for government benefits is based on their parents’ income and assets. However, when these children reach a certain age (usually 18), eligibility is based primarily on their own income and assets rather than those of their parents. If the disabled person’s assets (excluding certain items, like a home or car) exceed $2000, the government will discontinue benefit payments until any extra money has been accounted for.

Where to Turn

When it comes to funding your SNT, first assess your savings goals for lifetime care expenses. The Academy of Special Needs Planners offers useful calculators and checklists on its web-site, www.specialneedsanswers.com. You may consider hiring a life-care planner to develop a comprehensive assessment of current and future care needs and make recommendations. One effective source of SNT funding is life insurance. It requires a smaller initial outlay and the proceeds are received as tax-free income. With two parents, survivorship life insurance is the most popular funding choice because it is usually the least expensive. SNTs also can be funded with proceeds obtained by the beneficiary through court proceedings, inheritances, life insurance claims, settlements or gifts.

It’s clear that with special-needs care, government assistance only goes so far. This is why early planning is essential. Contact me for a complimentary copy of “Preserving and Protecting: Planning for Individuals with Special Needs.”

Ben Proctor, Vice President – Wealth Management, is a Certified Financial Planner ™ in Smith Barney’s Greenspring Station office.  He may be reached at (410)494-8097, via e-mail at ben.proctor@smithbarney.com or via his web-site at www.fa.smithbarney.com/benproctor .

Citigroup Inc., its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Smith Barney is a division and service mark of Citigroup Global Markets Inc. Member SIPC.

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