California Special Needs Trust Planning
Do you have a loved one who has special needs? If so, you definitely need the guidance of a special needs planning attorney who really understands public benefits AND knows how to BOTH draft and implement a special needs trust.
Common Pitfalls in Estate Planning for Special Needs Loved Ones
Many estate plans that we review do not take into account the extraordinary needs of a beneficiary who has special needs. In fact, some living trust estate plans we've reviewed leave an inheritance outright to a special needs person, basically guaranteeing disastrous results. In an effort to negate such results, we have found that some advisors counsel their clients to simply leave the inheritance of a special needs child to a sibling who will care for that child later.
In real life, it's hard to imagine worse advice. First of all, that sibling could lose the inheritance in a lawsuit (e.g., divorce, car accident, bankruptcy, etc.) or simply fail to use the funds “properly.” Second, this “solution” does not even begin to address the needs of your special needs loved one. Frankly, even where advisors “get it right” by helping their clients establish some sort of third-party special needs trust — because that advisor does not regularly implement special needs trusts — they fail to deftly draft that special needs trust to address the needs and desires of the special needs beneficiary.
What Exactly Does a Good Special Needs Plan Look Like?
It's actually not that hard to create. However, a good special needs trust and plan always requires a team of potential “helpers.”
Contrary to popular belief, the trustee of such a plan should almost never be a family member. Time and again, we have seen such plans fail. The reason is simple: Unless that family member trustee has specific experience helping those with special needs on a full-time basis, after a very short period of time (despite the best of intentions), that family member trustee becomes overwhelmed and frustrated with their role, leading them to give up.
Instead, a private professional fiduciary is usually the best person to serve as trustee of a special needs trust. Similarly, the trust should provide that a “care manager” periodically checks in on your special needs loved one and prepares a “guide” outlining what it is that they need in the relatively near future. Then, both the private professional fiduciary trustee, as well as care manager, report to a “family member trust advisor” who oversees and coordinates their roles.
The trust advisor also can approve or disapprove of trustee/care manager actions while retaining the power to fire and hire new different professionals, as well as retaining other important powers. This checks-and-balances approach to special needs trust planning is the cornerstone of any good special needs trust plan.
Special Needs Planning and Irrevocable Trusts
As an aside, please note that the special needs trust focused on in this section is a stand-alone irrevocable trust (generally used when there are enough assets to justify its creation; note that it can do a lot more than a simple special needs trust provision contained within a revocable living trust) which is a totally different type of trust than a revocable living trust.
Special needs trust provisions in a revocable living trust make a lot of sense when the distribution available to a special needs beneficiary is limited and/or the special needs beneficiary doesn't truly need a lot of help. A standalone irrevocable special needs trust is a much more robust instrument, meant to provide lifetime help to a special needs beneficiary. It is the gold standard when it comes to special needs planning.
With an irrevocable, standalone special needs trust, there are a lot of specific issues that need to be addressed. For example, under the SECURE Act passed in December of 2019, there are now more restrictive rules for beneficiaries taking distributions from retirement plans. However, qualified disabled or chronically ill persons can obtain favorable tax treatment by taking retirement plan distributions out over their lifetime. That might mean it makes sense to specifically leave a retirement plan to a Special Needs Trust, rather than other beneficiaries.
But what if a remainder beneficiary of that special needs trust is neurotypical (which is generally the case)? Well, such calls for very careful tax planning. Either way, special needs trusts also need to be able to retain income in the discretion of the trustee for the benefit of your special needs beneficiary. However, retained trust income in a special needs trust is taxed at the top federal rate of 37% at a mere $14,451 of taxable income in 2023.
Qualified Disability Trusts
Now, if the trust is set up to be a qualified disability trust, it can claim an exemption of up to $4,700 in 2023, which is not subject to phase outs. In any event, tax planning is just one of the complicated areas that arise in this arena and setting up a special needs trust willy-nilly is probably not a good idea.
Instead, if you need to set up a standalone, irrevocable special needs trust for your loved one, please take the time to research and find a qualified special needs trust attorney in your area to help you.
Get in Touch with Kaiden Elder Law Group Today
Here at Kaiden Elder Law Group, PC, we specialize in special needs trust planning. If you would like to ensure the wellbeing of your special needs loved one, please contact our office for a consultation.