Special Needs Trusts: Estate Planning is more than Tax Planning

Estate planning involves more than avoiding probate and estate taxes. Probate can be avoided by using Revocable Living Trusts. Estate taxes are not a concern for most U.S. taxpayers with the gift and estate tax exemption now at $11.4 million per person. Because of “portability,” a husband and wife can either gift or pass upon death $22.8 without paying any gift or estate tax, regardless of how assets are titled among spouses. But there are many other reasons for a comprehensive estate plan. For example, parents who have a child with special needs want the child’s inheritance to be protected so that any available government assistance remains in place despite the child’s inheritance. The Department of Health and Human Services estimates that 15% of US minor children have special needs. Absent the proper trust, the special needs child’s inherited assets would negatively affect government assistance eligibility. The key to drafting a special needs trust is to avoid the typical “ascertainable standards” prevalent in standard trusts. These ascertainable standards are “health, education, maintenance and support” – words within the trust world, interpreted by courts and commentators, that provide distribution guidelines for trustees. A special needs trust would not use ascertainable standards. In contrast, the special needs trust terms must expressly prohibit distributions that would disqualify the beneficiary from receiving government support. The trustee must have sole and broad discretion to distribute all or none of the trust income and principal. Thus, selecting a trustee in any trust is critical, but even more so with a special needs trust.