Protecting Children With Special Needs In Estate Planning

As the parent or guardian of a child with special needs, one of your concerns may be ensuring your estate plan protects their financial future. Leaving a lump-sum inheritance can affect eligibility for government assistance programs, such as Medicaid and Supplemental Security Income. Creating a special needs trust shields the beneficiary’s assets, allowing them to qualify for much-needed benefits. North Carolina law permits three types of special needs trusts.

What are the Three Types of Special Needs Trusts Available in North Carolina?

Self-Settled Special Needs Trust

Also known as a first-party SNT, the self-settled SNT is established using the disabled person’s assets. The person with the disability is the beneficiary, and the funds may come from earned income or a lawsuit settlement.

The beneficiary’s parent, grandparent, guardian, or the court must establish the trust, and it requires trustee management. One of the key restrictions of a self-settled SNT is age. North Carolina beneficiaries over the age of 65 may lose some of their Medicaid benefits.

And, when the beneficiary dies, the remaining trust balance must first be used to reimburse Medicaid and other government benefits before disbursement to successor beneficiaries.

Third-Party Special Needs Trust

Third-party SNTs are typically established and funded by family members, using the proceeds from an investment portfolio, life insurance policy, or income-producing property. The trustee may be a family member, friend, professional, or a combination of the three. 

There is no age requirement or Medicaid repayment criteria for a third-party special needs trust. Upon the beneficiary’s death, the remaining trust assets can be distributed to subsequent beneficiaries.

Pooled Special Needs Trust

Managed by nonprofit organizations, pooled SNTs allow beneficiaries to pool their individual accounts, saving on administrative fees and maximizing their investments. Personal accounts remain separate from others in the pool, and the beneficiaries receive a proportionate share of fund earnings. 

Pooled SNTs may be set up for a disabled individual of any age if the Social Security Administration recognized the disability before age 65. The state is then entitled to reimbursement for the benefits it provided, and any amount remaining in the trust can be distributed to the beneficiary’s heirs. Such trusts are also self-settled; however, the nonprofit trustee may receive up to 50% of the remaining trust when the beneficiary dies.

Why are Special Needs Trusts Necessary?

Individuals with mental or physical disabilities often require government assistance programs to help them manage their daily medical and living needs. Some of the federally funded assistance critical to disabled individuals include the following:

  • Medicaid
  • Supplemental Security Income
  • Food Stamps
  • Section 8 Housing

Federal needs-based programs have stringent compliance guidelines. SSI, for instance, limits personal assets to $2,000 for an individual and $3,000 for a married person. When administered correctly, SNTs allow beneficiaries to receive public assistance while also receiving the benefits of a trust. A trust holds the title to the assets rather than the individual, so they aren’t included in eligibility calculations.

What Does a North Carolina SNT Cover?

You may wonder why a person who’s the beneficiary of a windfall like an inheritance or large personal injury settlement would also need public assistance. The supplemental income from a trust provides a disabled individual with a better quality of life by covering some of the expenses a government subsidy can’t. Medical expenses alone can quickly deplete a person’s finances. 

Generally speaking, SNT distributions made to a third party rather than the beneficiary is not considered income and won’t reduce benefits. However, there are some important exceptions. The following examples illustrate how North Carolina SNT funds can and can’t be used:

  • Permissible SNT Distributions:
    • Health and life insurance
    • School tuition, books, and incidentals
    • Payment to a third party for home repairs
    • Bus passes
    • Cleaning supplies
    • Household goods
    • Medical equipment
    • Vehicle purchase and maintenance
    • Therapeutic massages
    • Medications not covered by government benefits
    • Home care services
  • SNT Distributions that will Reduce Benefits
    • Mortgage and rent payments
    • Property taxes
    • HOA dues
    • Homeowner’s insurance
    • Utility connection and monthly utility costs
    • Funds paid directly to the beneficiary
    • Groceries
    • Vacation lodging

What is a North Carolina SNT Trustee’s Responsibility?

The trustee is required to appropriately manage and invest the trust’s assets in the best interests of the beneficiary. Trustees may employ the assistance of other professionals. In addition to responsible investing, the key obligations of an NC SNT trustee include:

  • Bookkeeping and accounting of trust accounts
  • Tax reporting
  • Communicating with and meeting the needs of the trust beneficiary
  • Distributing trust funds according to current and future needs
  • Maintaining the beneficiary’s public assistance eligibility
  • Reporting to the appropriate agencies
  • Working and communicating with others who provide support for the beneficiary, including teachers, family, and social workers

How A North Carolina Special Needs Estate Planning Professional Can Help

An estate planning professional who’s experienced with navigating the complexities of North Carolina Special Needs Trusts can help ensure you’ve made the appropriate provisions for the future needs of your loved one. 

In addition to demonstrating how the trust assets will benefit your child with special needs, our firm can help you name an agent and create a financial power of attorney. Your designated agent will be empowered to use your assets to assist your child by establishing and funding a trust should you become incapacitated. 

We also recommend that you draft a letter of intent and include it with your estate planning documents. Written in your voice, it clarifies your wishes for your child’s welfare and adds a personal layer of information about specific preferences and activities that add value to your loved one’s life.

David Anderson and his team approach each case with sensitivity to the unique circumstances of your specific situation, making recommendations for the security and comfort of your family member. Our firm advocates for our clients’ rights, ensuring individuals with physical or mental disabilities receive the continued care you want for them. Contact our office today to schedule a consultation!

Posted in