Trusts for Children with Disabilities

by Frank L. Brunetti

Some parents of children with disabilities can be hopeful that their children will grow up to befinancially independent and eligible for adequate and affordable health insurance. Unfortunately,for many children with disabilities, this outcome is unlikely. In fact, many capable adults withdisabilities are underemployed and/or ineligible for health insurance due to preexisting conditions; others are unable to qualify for well-paying jobs. For these individuals, Medicaid becomes theonly option for health care coverage.

While there are state-to-state variations, individuals with assets of as little as $2,000 may beexcluded from Medicaid coverage. Unless these laws change, parents who hope to providefinancially for their child and ensure that he or she will receive adequate health care must findways to avoid conflicts with Medicaid eligibility rules.

Trusts

Some type of trust is typically the best way to manage property for the benefit of a person with adisability, because the trustee (the person designated by the will to manage the trust) can begiven the necessary discretion and flexibility to cope with the beneficiary’s special circumstances.However, most trusts are considered “resources” under Medicaid regulations, which state that”resources are considered available both when actually available and when the applicant orrecipient has a legal interest in a liquidated sum and has the legal ability to make such a sumavailable for support and maintenance.”

To prevent governmental claims for reimbursement of benefits paid to the individual with adisability, and to prevent the individual from being disqualified from receiving governmentbenefits, a trust established for the benefit of a person with a disability must be set up in such away as to avoid being considered a resource. The language used in drafting such a trust isessential; for this reason, it is crucial to find an attorney who has experience in estate planning forchildren and adults with disabilities. (For more information on finding an appropriate attorney, see”Estate Planning: Getting Started,” December 1995.)

The community trust

“Community trusts,” which are nonprofit organizations that pool resources for the benefit ofpeople with severe disabilities, may be an option for some families. Community trusts addresstwo major concerns for parents of children with disabilities—preservation of assets and selectionof a knowledgeable trustee. A community trust ensures that a beneficiary’s interest in the trust willnot be considered a resource and protects that interest against claims by creditors. In return forcontributions to a community trust, a designated individual with severe disabilities can receivelifelong services such as trust fund administration, advocacy (for example, participation bycommunity trust representatives in the development of individualized service plans) and/orguardianship.

Currently, only certain states allow the establishment of community trusts. Furthermore, because these trusts are a relatively new concept, we have no long-term data on their success.

The special needs trust

A “special needs trust” (SNT) gives the trustee absolute discretion to spend trust assets forexpenditures that are not covered by public assistance programs. In an SNT, income andprincipal are alternately used to pay for supplemental or “extra” items that will enhance thebeneficiary’s quality of life—vacations and field trips, traveling companions, entertainment,medical and dental treatments that are not otherwise covered, social services and transportation.In essence, the SNT is a backup fund intended to supplement, but not replace, public assistance.Thus, care should be taken to prohibit the trustee from spending trust assets on necessities such as food, clothing or shelter—all of which are currently covered by government assistanceprograms.

The SNT must be carefully drafted to prevent governmental claims for reimbursement of benefitsalready paid to the beneficiary, and to prevent the beneficiary’s disqualification from receivingfuture benefits. In addition, the parents’ will should provide for an alternate plan to deal with agovernmental attempt to “break” the trust (by bringing a lawsuit against the trustee in an effort toforce trust assets to be treated as “resources”). In that event, for example, the trustee may bedirected to terminate the trust and distribute its proceeds to other relatives, if any, or to analternate beneficiary (an individual, private foundation or community trust, if one is available) whowill use the funds in the best interests of the beneficiary.

Other considerations in drafting the SNT

The SNT can also require the trustee or another person to make periodic evaluations of thebeneficiary’s care and needs, including evaluations of facilities where the individual lives orreceives treatment. The trustee may also be required to consult state and federal agencies toensure that the beneficiary is receiving all the benefits to which he or she is entitled.

Most SNTs should also include a “spendthrift clause,” which prohibits the beneficiary from sellingor giving away his or her interest in the trust. In most cases, this clause will also protect trustassets against claims by creditors.

Finally, it is essential that the SNT provide for dispersal of trust assets following the beneficiary’sdeath. Even if there are no surviving relatives, the estate planner must designate a finalrepository for trust assets. Parents may consider empowering the trustee to make distributions toa community trust, should that option become available. But in no case should trust assets passto the beneficiary’s estate because this would make the assets liable to claims by creditors.