A special needs trust (SNT) is a unique type of trust document that manages assets for a person with disabilities. A trustee will oversee the assets and make financial decisions according to the terms in the trust. These trusts carry a huge benefit of allowing a person with disabilities to enjoy access to assets in the trust while not jeopardizing any government benefits like SSDI.
A special needs trust is a highly complex document and should only be prepared by an experienced estate planning attorney. Listed below are five extremely costly mistakes that can be made in drafting a SNT:
1. Failure to Make the Trust Irrevocable
All first-party special needs trusts must indicate that the trust is irrevocable. If the SNT is revocable, the assets are considered available to the disabled beneficiary and this will result in the loss of public benefits. A third-party SNT may allow the third-party grantor to revoke the SNT during his or her lifetime since this does not convey any power of the assets to the disabled beneficiary and therefore will not jeopardize public benefits.
2. Requiring Mandatory Distributions of Income
The primary function of the SNT is often to avoid loss of government entitled benefits. This means that it is key to give the trustee full discretion over distributions. A mandatory distribution schedule usurps that discretionary authority and undermines the intentions behind setting up the SNT. These mandatory distributions will be considered unearned income by SSI and Medicaid. Any SSI payments will be reduced dollar-for-dollar by the amount of the mandatory distribution.
3. Naming a Novice Trustee
With many trusts a family member may be appointed as the trustee. This is not advisable for a SNT. A trustee for a SNT should be a knowledgeable professional who understands tax and public benefits laws. Additionally, a professional trustee can be objective about enforcing the terms and making appropriate decisions about distributions.
4. Underfunding the SNT
The first step in the process is to create a Letter of Intent which provides in extreme detail all the needs of the disabled person. This lengthy document describes the activities of daily living, all medical information, all financial information and details of the care team. This document will help the grantor determine how much funding the SNT needs. Funding decisions can then be made to adequately provide for the disabled person in the SNT.
5. Payback Provisions
Payback provisions apply solely to a first-party SNT. Including payback provisions in a third-party SNT is a costly mistake that could lead to serious consequences for the person creating the document.
If you need assistance in creating a special needs trust for a disabled loved one, reach out to Stouffer Legal in the Greater Baltimore area for a consultation with a knowledgeable attorney who can help prevent some of the costly mistakes listed above. You can schedule an appointment by calling us at (443) 470-3599, emailing us at office@stoufferlegal.com, or register for an upcoming free webinar using the link below:
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