Stroll Lloyd Harbor- May 2024
A supplemental needs trust (SNT) is an important estate planning tool for those with a special needs child. It ensures that your special needs child is taken care of after you are gone. Unlike other types of trusts, assets placed in an SNT can only be used for items not paid for by government benefits, e.g., Medicaid. The receipt of assets by a person receiving government benefits could jeopardize those benefits.
An SNT can be used to pay for supplemental needs, such as utilities, medical care, special equipment, education, job training or entertainment. SNTs created and funded by someone other than the special needs person can state to whom the remaining assets should be paid upon the death of the special needs person (for example, to that person’s children, or your other children and/or grandchildren).
Remember, assets that have beneficiary designations (like IRAs, pensions, life insurance, transfer on death accounts and the like) and jointly held property (like joint bank and brokerage accounts and real estate) should be looked at carefully to make sure assets are not passing outright to a special needs person upon your death. If a special needs person does inadvertently receive assets, a “self-settled” SNT can be created, in which the guardian of the property of the special needs person brings a court proceeding to have an SNT created. The difference with a self-settled SNT is that upon the death of the special needs person, the government must first be reimbursed from the SNT for all government monies spent on behalf of the special needs person during life, with any remaining property paid to family members.
One way to fund SNTs is with life insurance. The insurance on your life can be purchased by an irrevocable life insurance trust (an ILIT) that you create; the trust’s terms can provide for an SNT for your special needs child. For example, let’s assume you have two sons, John and Jim and a $2 million life insurance policy held in trust. Jim has special needs and receives Medicaid. Upon your death, the proceeds of your $2 million life insurance policy are paid to your ILIT (free of estate tax). The trustee of that trust is directed to split the trust into two trusts, one for John that gives the trustee broad powers to pay income and principal to John, and another for Jim that qualifies as an SNT, with distributions permitted to Jim only for “supplemental” items.
This article appeared in the May 2024 issue of Stroll Lloyd Harbor.
