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Everything That Can Go Wrong with Third-Party Funded Special Needs Trusts

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A recent question submitted to a newspaper publication concerning confusion over a trust that was established in New Jersey for a beneficiary that lives in Florida highlights just how important it is for those who want to set up a trust to work with an experienced estate planning attorney who asks the right questions and involves the right people—including any relevant family members—in assisting you to accomplish your estate planning goals.

The question came from an individual whose father, while living in New Jersey, set up a trust to specifically protect funds that may be needed for his son’s nursing home care one day in the future; a son who had been living in Florida since 2005. However, after the father passed away in 2019, Florida failed to “follow the trust,” and the son—not having any information about the trust—could not understand why, or whether this was illegal.

Special (Aka Supplemental) Needs Trusts Demand Estate Planning Attorneys with Specific Experience

A trust like this is known as a third party funded special needs trust (aka a supplemental needs trust). We’ve discussed special needs trusts before in the context of setting one up for a disabled child and just how important it is that they be established with an experienced estate planning team because failing to set them up in a very specific way could end up interfering with other benefits relied on, such as Medicaid. This attorney should also come up with a strategy for ensuring that the trust funds are not subject to federal reimbursement rules and, at the same time, establish a qualified income trust and rollover IRA so that any retirement funds left to the child won’t affect other benefit programs that they participate in, such as Supplemental Security Income (SSI). In a nutshell, the terms of the trust must provide the trustee with discretion to supplement the beneficiary’s benefits, but not supplant them, otherwise, if the funds from the trust are used to support the beneficiary, the beneficiary can be disqualified from receiving government assistance.

When The Beneficiary Lives in A Different State Than Where the Trust Is Established

Although a number of government benefits (such as Medicaid and SSI) are provided for by federal laws, they are implemented by the states, and, as a result, there are variations from state to state regarding applicable rules. As a result, when the beneficiary lives in a different state than where the trust is established (as in this case), the trustee must be made aware of the rules that affect distributions in the state where the beneficiary lives. In this case, that means Florida.

Florida’s Minimum Requirements for Special Needs Trusts

Unfortunately, it appears that this did not occur. Not only was the father not made aware of Florida’s rules affecting distributions to his beneficiary (i.e. his son), but his son apparently was not made aware of the trust’s existence at all until after his father passed away.  In this situation, it appears that one of Florida’s many rules regarding special needs trusts has either been broken, or was never satisfied in the first place, and as a result, the trust has become unavailable to his son. That could have been due to any one of the following legal requirements, for example:

  • Florida special needs trusts are not available to anyone over the age of 65
  • The father may have set up an irrevocable trust versus revocable living trust, which would prohibit making updates to address any changes in the law in order to prevent disqualification
  • The trust language itself may not have followed the laws governing Florida special needs trusts, which require that the trust be designed as a special needs trust, for a disabled individual under the age of 65, and include details regarding how the trust assets are spent, that the intent is to allow the beneficiary to be eligible for ongoing public assistance (including Medicaid or SSI) and to supplement instead of supplant public benefits. In addition, distributions must be made at the trustee’s discretion to maintain the beneficiary’s education, health, safety, and welfare when not already provided for by public assistance and the trustee must reimburse all state Medicaid bills if the trust is terminated and other estate expenses have been paid. Because the trustee must withhold and retain in the trust any distribution of funds that could affect the beneficiary’s benefit eligibility if the beneficiary is or becomes disabled, that could be another reason why Florida isn’t distributing the funds in the trust.

If You Have Any Questions or Concerns About Special Needs Trusts or Providing for Someone Who Lives in Florida Even If You Live Out of State, Contact Gierach & Gierach, P.A.

Having a professional trustee (i.e. one that is familiar with the regulations applicable to programs such as Medicaid) administer a Florida special needs trust is the best way to ensure that the law is followed throughout the duration of the trust. If you have any questions about estate planning in Florida, including planning for a beneficiary who lives in Florida (even if you live out of state), contact our experienced Orlando estate planning attorneys at Gierach and Gierach, P.A. today to find out how we can best serve you.

 

Resource:

nj.com/news/2020/09/this-trust-was-supposed-to-protect-money-was-it-a-mistake.html

https://www.gierachlaw.com/using-estate-planning-to-save-significant-funds-on-college-tuition-for-loved-ones/

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