Trusts for the Disabled

With the battle over taxes and estate planning techniques about to heat up, one type of planning vehicle has avoided contentious debate: the special-needs trust. These trusts are supposed to supplement the benefits a disabled person receives from the government — paying for additional services or equipment not otherwise covered — but not to supplant them.

Interest in the trusts has been growing over the last decade, but despite the many advantages the trusts offer, some people still shy away from them.

“We’ve run across families who are very wealthy and said, ‘I’ll just leave money for this beneficiary,’ ” said Holly C. Merry, head of specialized trusts at J. P. Morgan Private Bank. “What that results in is the beneficiary losing access to some government needs-based benefits.”

She added that another common solution — leaving money to a family member to care for the disabled person — creates unnecessary uncertainty at an already fraught time: “You’re never completely sure what that person will do after you’re gone.”

The complexity of administering special-needs trusts to insure the disabled person does not lose Medicaid or Supplemental Security Income often scares families away. But the legal and financial benefits of the trusts can outweigh the burden of setting them up.

CHOICES
There are two common types of special-needs trusts.

One is known as a first-person, or OBRA, trust. It is named for the Omnibus Budget Reconciliation Act of 1993, which tightened the guidelines for creating special-needs trusts. To set up a first-person trust, the assets have to come from the disabled person. Typical sources for the money are a legal settlement or an inheritance.

“In general, OBRA trusts are smaller” than another kind of special-needs trust, the third-party trust, said Wayne H. Madsen, guardian administration manager at Northern Trust. The reason, he said, is that the amount in the trust will be spent down, as opposed to a third-party trust where the recipient is just drawing the interest.

The third-party trust is slightly less restrictive and created by the disabled person’s family. It is used as a safety net for the child and in some ways is not so different from a regular trust.

“The reason, as a parent, you would want to do this is government benefits may not be enough to maintain your child in a place or condition you would want them or could afford,” said James L. Kronenberg, managing director and fiduciary counsel at Bessemer Trust. “Secondly, it’s not clear in this day and age that government benefits will continue.”

Both types of trusts, though, have to adhere to strict legal guidelines. “Special-needs trusts are designed to supplement but not supplant the entitlement programs,” said Ronnie S. Ringel, managing director at Fiduciary Trust Company.

CHALLENGES
The toughest part of these trusts is administering them. Regardless of the type of trust, money from them cannot go directly to the disabled person. Doing so could disqualify the person from government benefits. Instead, the trust has to pay the service provider, be it a nurse or a wheelchair company.

The big issue here is ensuring that the money in the trust is used solely for the disabled person’s benefit. “There are always questions like, if the family goes on a vacation, how can you pay for it?” Ms. Ringel said. “A disabled person needs someone to accompany them, but this money needs to be used only for that disabled person’s benefit. It’s difficult often to separate.”

The best-written trusts are usually careful to stick to broad but accepted wording. Mr. Kronenberg said that New York State, for example, offers suggested language for drafting these trusts, and there is little reason to deviate from it.

“I’ve seen some trusts that don’t follow the language of the statute and they get screwed up so the government has a claim on the assets,” he said. “Honestly, it couldn’t be easier to follow the language of the statute. The trusts are written in the broadest possible way.”

Administering these trusts is not easy, but fees for doing so are in line with managing other assets. Northern Trust, for example, charges 1.25 percent on the first $1 million of an OBRA trust and 0.80 percent on the money on top of that.

Still, complying with the laws is crucial. One thing expected to change as health care reform takes effect is how much income a disabled person can keep before losing eligibility for Medicaid. While that amount is expected to rise, Ms. Merry said that administrators of trusts would still need to be sure that distributions stayed in line with what was allowed by Medicaid.

AT THE END 
Often, the disabled person dies before his money runs out. Funeral expenses can be paid out of the trust, but what happens to the rest of the money depends, again, on the type of trust.

With a first-person trust, the remainder typically goes back to the government to reimburse it for what it has paid out.

Mr. Kronenberg noted that many settlements for workplace injuries were structured so that whatever remains after the recipient’s death was forfeited. This often allows the disabled person to win a much larger settlement, because companies or government entities know they will probably not have to pay out the full amount.

Parents who set up a third-party trust for a disabled child have more discretion over the balance. They can direct that the remainder go to other children or to an organization, as they would with any trust.

One heartening point from an often sad and difficult situation is how other siblings react. Estate planning is rife with stories of brothers and sisters waging war over their parents’ money, but Mr. Kronenberg said this is rarely the case when a sibling is disabled.

“If the care of the child is going to be very expensive for a family, I’ve never seen the other siblings complain,” he said. “Somehow, people rise to the occasion.”

SOURCE
Pathways to Citizen Advocacy: F2: Disibility Awareness and Attitudes
Decision Making and People with Intellectual Disibilities