Planning for Special Needs Persons

By George Chamberlin

A special needs person is one who has mental or physical disabilities which prevent the person from enjoying life fully. Clients who have a special needs person in their family – and there are many – often seek advice and assistance in making appropriate provision for the special needs person. Whether a minor or an adult, the special needs person can be benefitted significantly by gifts from their family members or through planning for their own assets. These private resources are quite separate from benefits which may be available to special needs persons through a variety of government programs although potentially subject to a variety of requirements and restrictions.

As a result, a central aspect of special needs planning is ensuring that the income and assets made available to the special needs person by and from the client are not implemented in such a way as to decrease the special needs person’s access to and level of governmental benefits. Instead the goal is to utilize such income and assets to fund those supplemental expenses and needs which are not covered through the government programs.

It is important to understand that planning for a special needs person also depends on the context of the planning and relationship between the client we are advising and the special needs person. For example, the client may have special needs due to disability sustained through accidental injury or disease which requires a different approach than the client who has a special needs child for whom planning is desired. Another situation may be a client seeking to plan how best to handle a family member’s personal assets where that person is a special needs person and unable to plan for those needs.

Government Benefit Programs
Central to planning for special needs persons is the availability of a variety of governmental benefit programs which may help to cover the costs of care quite apart from a client’s or special needs person’s own resources. These benefit programs are wide ranging and may be divided into programs which are needs based/means tested or which are based on other eligibility requirements.

The most common needs based programs are Medicaid and Supplemental Security Income (SSI). These programs provide benefits which are reduced or set off against the assets and income of the special needs persons benefitting from these programs. Whether planning for a client with special needs or a client’s child with special needs, it is important to know that certain assets may not be countable, that is, are not considered in the evaluation of the special needs person’s eligibility for means tested government benefits. For example, one’s home or automobile will not be counted in the means testing process.

Similar in name but NOT to be confused with these needs based benefit programs are two governmental programs that are based on work history as opposed to need: Social Security Disability Income (SSDI) and Medicare. We are all familiar with Medicare, providing medical benefits to those over age 65, and Medicare also provides benefits to younger persons who are recipients of SSDI. This disability income is paid to persons who have met basic work history requirements and are disabled. As you can see, these benefits would not be available to a client’s child in most cases.

Other federal and state government benefit programs which may be applicable for special needs persons include the Supplemental Nutrition Assistance Program, home energy and utility assistance programs, family assistance programs and education programs including, for example, educational savings accounts for special needs persons which are available in Arizona, Florida, Mississippi and Tennessee. There are many other laws that may provide benefits for special needs persons such as the Individuals with Disabilities Education Act. Working with an expert in these programs may ease the process, reduce the chance of overlooking potential benefits and overall improve the results for the special needs person.

Private Resources
Quite apart from the various types of governmental benefits that may be available to special needs persons, clients want to be able to plan on how their own resources may be used to help the special needs person. Most often, the question arises in the context of the client’s special needs child and how best to provide for that person. During the client’s lifetime, direct provision of the extras to benefit the child – supplemental needs – is relatively straightforward. The client, knowing what basic benefits the special needs child is receiving, can easily tailor contributions to cover those desired extras. Further, any health or education related items may be paid directly to the provider, avoiding any impact on the right to benefits from government programs as well as avoiding any gift tax implications where substantial amounts are involved.

Typically, our clients’ questions and concerns are for when they no longer can be involved in the special needs child’s life due to their own death, disability or other similar event. Since a client will not know when such an event may occur, getting planning in place sooner than later may be an important goal. Such planning also works even where the special needs person is not the client’s child. Planning for a client as the special needs person or planning for a third party special needs person’s own assets is discussed later in this article.

The special needs trust (SNT), also known as a supplemental needs trust as it is designed to fund the extras that do not come through government programs and benefits, uses assets provided by someone other than the special needs person, usually our client. The trust may be established currently, to operate during the client’s lifetime, or may be a testamentary trust which becomes funded and active only at the client’s death. This type of trust is typically set up as a spendthrift trust, meaning that it provides protection against the creditors of the special needs person. The goal is, of course, to ensure that the trust provides for the special needs person and not the taxing authorities, creditors or other similar persons.

An important aspect of the trust and its operation is the discretion of the trustee. Where the trustee of the SNT has full discretion over distributions to and for the benefit of the special needs person, the trust is not an available resource to the special needs person but some distributions may run afoul of the needs based requirements. This problem may be avoided by limiting the trustee’s discretion to make distributions to only allow those distributions which are not for basic needs but instead for special or supplemental needs only. The trust might require the trustee to make distributions only when found to be in the best interests of the special needs person. All of these variations point to the need to make a thoughtful and careful selection of the trustee and any successors as well as the need to work closely with an attorney to ensure the trust is properly drafted.

Funding the trust generally will result in transfer tax at the time of the funding, whether during the client’s lifetime or at death. Unless the SNT is particularly large, the client’s lifetime gift exclusion should easily cover the amount of the transfer so that no tax payment is due. Income taxes are generally charged to the trust itself at the highly compressed income tax brackets (the highest marginal rate applies at a very low threshold) unless the trust is a lifetime trust and the client retains sufficient powers and control for the trust to be treated as a grantor trust. In such case, the client will bear the tax burden and that may well not be desirable depending on the client’s personal income and tax situation.

Planning with Assets of the Special Needs Person
In some cases, a client may become disabled and desire to utilize his or her own assets to address needs beyond those funded through governmental programs. Similarly, a parent may desire to establish a trust for a special needs child, funding the trust with the child’s own assets, effectively removing them from the child’s control but allowing for the trust income and assets to be used for that child’s needs. This type of trust, called a (d)(4)(A) trust after the statute creating it , will allow the special needs child to qualify for and receive government benefits without the assets reducing or preventing such aid. The trust assets may be used to pay for a variety of supplemental needs and extras for the beneficiary. However, at the death of the special needs child, or of the client whose assets funded such a trust, the trust must repay the State from any remaining assets for the medical assistance paid on behalf of the special needs person.

These trusts, termed self-settled trusts since they utilize the assets of the special needs person to benefit that person, should not accept contributions from other persons or sources. If others are interested in benefitting the special needs person, their funds are best placed in a third party SNT as discussed above. Note that a client or third party could establish an SNT for a special needs person in addition to that special needs person having their own self-settled trust.

Since the beneficiary of the trust, the special needs person, is also the person whose assets funded the trust, there is likely no transfer (gift) tax consequence on funding the trust. The assets are still being used for the special needs person. Income taxation of the trust depends on the status of the trust as a grantor or non-grantor trust and it is best to consult with your tax professional to make the best decision on this choice. A grantor trust pays no income tax itself and the grantor – here the special needs person – will be the taxpayer and presumably at a fairly low rate and bracket given the disability. A non-grantor trust is of course responsible for its own tax burden but that may be limited if the trust is treated as a qualified disability trust. Just as we mentioned working with an attorney in drafting the terms of the trust, it will usually be helpful to consult with a tax professional so there are no mistakes and no surprises.

Modeling Special Needs in the Client Plan
Where a client is going to include planning for one or more special needs person in the client’s own financial plan, the requirements are fairly simple from a modeling standpoint. There may need to be some homework by the client regarding the actual level of need anticipated, the benefits available and the drafting and terms of, for example, a special needs trust. However, for data entry in the plan, we have only a couple of considerations.

Where the client is retired and plans to make regular, recurring distributions to a special needs person during the client’s retirement, then a specific spending goal should be used to isolate the goal and make clear what the client’s burden is expected to be. Prior to the client retiring, recurring distributions will be modeled as goals only where they are funded directly from assets since the more common approach has been to fund goals from current income and related cash flow (and this is why we do not see budgeting in the software).

The funding of a special needs trust is a one-time event and this goal would almost certainly be funded from client assets. Therefore, the timing and amount for the funding would be entered as a goal in the client’s plan. A testamentary trust to be funded at the client’s death could be factored into the plan as the client’s estate or ending goal in whole or in part depending on other planned transfers.


Title 42 U.S. Code Section 1396p


George Chamberlin has been working in the legal and financial industry for over thirty years, including working at Wealthcare Capital Management from 2002-2009. George practiced law for several years before focusing on writing, planning and software development in the estate planning and financial planning areas. During his time at Wealthcare, George wrote weekly e-mails for advisors and their clients, engaged in basic and advanced financial planning and estate planning as well as working on a variety of other Wealthcare projects. Since 2009, George has worked as a registered investment adviser representative in his own firm, meeting and planning with clients, and more recently as a consultant to financial advisors, including Wealthcare advisors, on a variety of matters including advanced financial and estate planning.

George Chamberlin & Mentor RIA Consulting © 2015