For people who have loved ones with disabilities, proper estate planning can ensure financial independence throughout their lifetimes. However, leaving money to them directly can jeopardize any government assistance for which they might qualify.
"Government benefits, which cover things like health care and housing, can be terminated if the recipient's income, assets, or both exceed certain limits," says Austin Jarvis, director of estate, trust, and high-net-worth tax at the Schwab Center for Financial Research. "For these situations, a special-needs trust can be indispensable."
How they work
Special-needs trusts are irrevocable trusts that preserve the beneficiary's eligibility for need-based government benefits because the trust—not the beneficiary—owns the assets. Such trusts can pay for quality-of-life expenses outside the scope of government assistance, such as education, entertainment, and travel, so long as the funds are used only for substantiated expenses not covered by government benefits.
In particular, you may wish to consider a third-party special-needs trust, which can be established by anyone other than the beneficiary to help provide for someone with a disability. If you create the trust during your lifetime, it can receive gifts from any third party, such as a family member or friend. By contrast, if you create the trust within a will or living trust, it will be funded upon your death and cannot receive contributions from others.
"In my previous job as a trust officer, for example, I worked with a couple who set up a special-needs trust for a grandchild," Austin recalls. "They gave to the trust every year, but the trust also received gifts from the child's parents, family members, and friends. They even supplemented it with a life insurance policy that would pay out when one of the grandparents died."
Mind the missteps
Trusts in general are complicated financial vehicles, but special-needs trusts have the additional burden of staying on the right side of government rules, which can vary by state. Here are two common errors made by those creating such trusts:
1. Failing to appoint a specialized trustee
Special-needs trusts require a much higher level of fiduciary responsibility than other types of trusts: If the trustee mismanages the funds, the beneficiary could lose their government benefits. "It's best to work with a professional with a special-needs designation, such as a Chartered Special Needs Consultant®," Austin says. "The risks are just too great to select someone without a deep understanding of the legal and financial duties required of this role." If you do engage a corporate trustee, be aware that their fees, like all management costs, can reduce the trust's assets. "Standard fees generally range from 0.5% to 1.5% of invested trust assets," Austin says. "But those fees can be more than worth it for the peace of mind they provide if you're receiving the service you expect."
A corporate trustee provides financial expertise, unbiased decision-making, and fiscal responsibility for the duration of a trust.
Schwab Personal Trust Services, administered by Charles Schwab Trust Company, will:
- Administer your trust according to the terms of your trust.
- Manage the investment of your trust's assets.
- Put the interests of the trust and your beneficiaries first.
To learn more, visit schwab.com/trusts or contact your Schwab financial consultant or a Schwab Chartered Special Needs Consultant®.
2. Failing to update accounts to match the trust documents
There are three places where this typically happens:
- Account titling: "Never make your heir a joint owner on your financial accounts," Austin says. "If you die and they become sole owner, it could disqualify them from receiving government benefits." To fund the special-needs trust with these assets, be sure to title the accounts in the name of the trust, not your child.
- Beneficiary designations: Likewise, if you name your heir—rather than the trust—as a beneficiary on your annuities, life insurance, retirement, or other financial accounts, you're putting their government benefits at risk.
- Testamentary designations: "When you establish or update your will, be sure to confirm you've used the exact name of the special-needs trust," Austin says. "Anything other than a minor spelling mistake could require your executor or trustee to go to court to prove your intentions."
The long view
As part of this planning, it's important to anticipate other challenges that may present themselves throughout your loved one's lifetime. "If you're the legal guardian of an adult with a disability, for example, you also need to ensure you've identified a successor guardian who is familiar with your heir's situation and can continue to advocate for them after you're gone," Austin says.
Given the risks, it's ideal for everyone involved in the process—from the estate attorney who drafts the trust documents to the trust company that manages it—to be experts in special-needs trusts.
"Otherwise, they're more likely to make a mistake—and a small error today could bloom into a massive obstacle down the line," Austin says. "The Special Needs Alliance can help you find qualified legal support in your area."
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