3 and a Half Problems with Special Needs Trusts

If Special Needs Trusts had a motto it would be:

“Everything you want to take care of your disabled child… And Less”

And that “And Less” is a real problem (wait for Problem 3.5 for the WORST)

For us, the problems began even before we started.

Problem 1 – Psychic Parents

I am a very lucky and privileged guy. My parents had enough money to want to start a trust for our kids… and, they did when my son was a baby.

Unfortunately, our trust was a standard (irrevocable) trust. And, several years later when our son was diagnosed with autism, we found out that the trust couldn’t be turned into a special needs trust… sooooooo… we wound up having to empty the trust (and pay a lot of taxes) and start over with a new trust (definitely a privileged problem).

I often say “my psychic powers suck”… I can’t read people’s minds or predict the future. WE couldn’t have planned for my son’s diagnosis or have any idea that we had the wrong kind of trust.

But our lawyer could have (and so could the state… lawyer is easier in this case)*.

ANY and ALL trusts set up for children should be set up as a Special Needs Trust… as far as I can tell, there is no penalty to do so if your child is not disabled (you’d basically never “activate” the Special Needs Trust powers).

Or the state could allow a trust to be trivially converted to a special needs trust without penalty if necessary.

* DISCLAIMER – I’m not a lawyer…but this has got to be fixable!

Problem 2 – Cost to Set Up

Unless you are fairly wealthy (or have wealthy-ish family or benefactor), you may not need a Special Needs Trust while the parents are alive. A Special Needs Trust is often straightforward, but does add some cost to an estate plan (NOTE – don’t neglect to set up your estate plan – especially if you have a disabled child! If you don’t, the government has a “Default Plan” for you… and you aren’t going to like it at all!).

I don’t see why a financial services company like Vanguard or Etrade or Charles Schwab couldn’t set up standard “Special Needs Trusts” as just another kind of account. This would be a good business for them and solve the trust needs for most families. You can have multiple Special Needs Trusts (unlike ABLE accounts) and so if you need another one to hold a house, business, or other assets… you’ve probably got enough money to set up one.

If you are interested in getting a “Special Needs Trust in a Box” out there in the world, shoot me a note and we’ll start a petition or something… or, even better, if you know anyone in the financial services industry, let me know and I’ll go bug them.

… or maybe we should set up our own “Disability Financial Services Firm” to address the unique needs of our communities?

… because there are a lot of things we could do to help each other financially… if we had a friendly bank :)

Problem 2.5 – Third-Party-Ness

This one is tricky. Special Needs Trusts can be set up as either first party (owned by the beneficiary) or third party (administered for the benefit of the beneficiary). If the trust is a first party trust, it is subject to Medicaid Estate Recover (Clawback), but if it is a third party trust, the beneficiary (your child) doesn’t really control it (see my previous article that goes into the Autonomy Problem).

One suggestion that I mentioned previously, was to set up the trust as a default with the beneficiary being able to hire and fire and select the trustee(s).

The other, bigger change of course is to end the model of treating disability services as a benefits program like Welfare and treat it like Medicare – an insurance program… you don’t have to impoverish yourself to have heart surgery … do you?

3.5 Limitation on Spending

This constraint on Special Needs Trusts kind of makes the whole exercise questionable. You can’t use funds or assets from a Special Needs Trust to pay for “essential” things (food, rent, etc.) … you know, the stuff your child will absolutely need or those funds will be considered a “resource” and count against their eligibility for services like SSI and Medicaid.

The only exception being that you could hold a house for them to live in in the Special Needs Trust (though some states exclude an owned home from counting against assets… your mileage may vary a lot).

So, you can pay for your hobbies, but not food or shelter!

ARGH!!!!

The only way around this is to pass funds for food and housing through an ABLE Account as those funds are much less restricted… but this does put a hard limit of (currently) $19,000 a year in “new” funds being added to the ABLE account for use that year.

… and $1,538.33 a month won’t get you very far here in the San Francisco Bay Area or a lot of other places in the US.