When you hear the term “special needs planning” you might immediately think about the plans needed to ensure a loved one with special needs, like a child who has a disability, is provided long-term care. While this is certainly true, special needs planning isn’t just limited to providing for people with disabilities.
Parents of a child with special needs know early on that they will need to take action to provide for their son or daughter and create a plan that addresses this concern, especially after their lifetime. However, many people who do not have a loved one with disabilities should also consider special needs planning for another situation that is extremely common but often overlooked or not expected by most older adults.
If you are married or have a partner and you are approaching or enjoying your retirement years, then you likely will want to think about incorporating special needs planning into your overall estate plan. This is because it will be invaluable in case your spouse ends up needing to live in an assisted living or skilled nursing facility while you are still living in the community – or vice versa.
Why do I need special needs planning?
Special needs planning is essential because it can enable you to preserve your assets when you might otherwise lose them through a Medicaid spend down. Essentially, when facing the prospect of needing to pay for long-term care in an assisted living or skilled nursing facility, Medicaid can be a lifeline for covering the exorbitant long-term costs of this kind of care. However, it's often necessary to take actions that will enable you to qualify for Medicaid. In order to become eligible for Medicaid, you likely will need to spend down your assets to meet your state's requirements for meeting the income threshold.
With special needs planning, however, you can prepare for this eventuality and create an arrangement where you can both qualify for Medicaid and preserve your hard-earned wealth to pay for additional needs or medical expenses.
How does special needs planning preserve assets from Medicaid spend down?
With advance planning, you can avoid having to deplete your assets in order to qualify for Medicaid. This is because there are strategies you can employ to transfer assets in such a way so that they do not count against you for purposes of Medicaid qualification.
For example, when you transfer assets to a third-party special needs trust, it will not be used against you for Medicaid eligibility as long as you do not have a duty of support for the beneficiary of the trust, like a parent or a spouse. So, you could create a third-party special needs trust if you and your partner are not legally married to avoid having the transfer be considered for Medicaid purposes. However, even if the trust is set up to benefit someone you have a duty to support, like your wife or husband, transfers completed after your lifetime will not be penalized. So, this means that if your loved one needs to qualify for Medicaid to receive coverage for long-term care after you are gone, you can arrange for your assets to be transferred into a third-party special needs trust and avoid having them counted against her for Medicaid eligibility.
Similarly, when you establish a properly structured and administered supplemental benefits trust, then the assets transferred into that trust will not cause your spouse to become disqualified for Medicaid. As a result, you could create a supplemental benefits trust, transfer assets from your joint estate, and then those assets will not be used against you when determining if your spouse is eligible for Medicaid coverage.
Additionally, because a supplemental benefits trust is a third-party trust solely for the benefit of another person, you can avoid having to include a payback provision. In other special needs trusts, you might be required to include this kind of provision, which directs that the state be paid back for the government benefits received by the beneficiary after their lifetime. However, you can avoid having to pay back these benefits by using a supplemental benefits trust. In this way, you can name beneficiaries of your choosing to receive any remaining assets after the beneficiary passes.
It can be incredibly useful to plan ahead for this type of circumstance by considering a special needs trust. By taking a few simple steps and working with an experienced estate planning professional, you can avoid having to dissipate your assets in order to ensure you or your loved one can qualify for Medicaid and receive specialized care needed later in life.
In addition to a special needs or supplemental needs trust, there are other strategies you might consider to protect your loved one far into the future, like a supplemental benefits trust provision.
Why add a supplemental benefits trust provision?
Another option for addressing this issue is adding a provision in your estate planning documents that will create a supplemental benefits trust for you or your spouse once either of you passes away.
Although many people who find themselves in the position where their loved one is in an assisted living or skilled nursing facility may assume that their partner will pass first, that's not always the case. Often, these couples will create an estate plan based on that assumption. However, if the spouse who is still living in the community passes away first, then that plan could end up harming the surviving spouse.
If your plan is crafted in this way, then it likely would mean the spouse who needs care will be the beneficiary of the estate. Similarly, if you fail to create an estate plan and your state's law will then direct how your assets will be distributed, then the surviving spouse who is in a care facility will likely be the main beneficiary. This is problematic, because a direct inheritance could result in the loss of Medicaid benefits. Rather than continuing to receive this support, your loved one would be forced to use the assets inherited to pay for care. This would mean your wealth could be rapidly dissipated without alternative planning.
One solution to this problem is naming a third-party supplemental benefits trust to receive any inheritance by the surviving institutionalized spouse. This would preserve his or her Medicaid qualification and would make it so that your assets could be used to improve their quality of life through supplemental support. This option is also attractive because it would not require a payback provision, as it's not a first-party trust funded with the beneficiary's assets.
In order to complete this plan, you simply work with a knowledgeable estate planning attorney to add a provision to your current will or living trust that directs the creation of the third-party supplemental benefits trust in the event that the spouse in a care facility survives his or her partner. By adding this provision, you can preserve your assets and avoid losing Medicaid coverage should the order of your passing not be as expected.
What are the benefits of this type of planning?
There are several different reasons why it's often beneficial for couples in their later years to consider embarking on this kind of special needs planning.
First and foremost, it's the most effective way to preserve your assets and protect your wealth should the situation where one spouse needs additional care were to arise. This is because creating a plan that addresses the consequences of such an outcome helps to hedge against the risk that all of your joint wealth is needed and used to pay for that care.
In addition, special needs planning aims to preserve Medicaid qualification. As mentioned above, long-term care facilities, whether that's assisted living support or more intensive skilled nursing care, are often extremely expensive. It's the reason why long-term care insurance is now difficult to find, and why policies that are available tend to be prohibitively exorbitant. Knowing the cost of this kind of care, it's easy to see why most people would prefer to have Medicaid coverage. Especially when a person can spend years in such a facility, it becomes more and more important over time to have that support. And while you can become eligible for Medicaid by spending down your assets, you will be much better off financially if you can avoid doing so. With special needs planning, you can have the best of both worlds.
This type of planning is also useful because it helps you to avoid emergency “at need” planning should the spouse who still lives in the community pass away first. As the spouse who is in a care facility will need to ensure Medicaid coverage continues (or begins) in the event that their spouse passes first, he or she will be placed in a position where urgent planning must take place if this outcome is not addressed in initial estate plans. Absent special needs planning, the institutionalized spouse will be burdened with determining what to do should their spouse in the community pass away unexpectedly.
It also is important to engage in this kind of planning, because as mentioned previously, these options often do not require a payback provision. This means that you and your loved one can receive the benefit of Medicaid coverage without having to pay back the value of those benefits when the spouse receiving coverage passes away. Because the assets are not owned by the Medicaid recipient once they are placed into a special needs or supplemental benefits trust, the state cannot go after those funds after his or her lifetime.
Another important advantage to special needs planning is that these arrangements make it so that you have additional funds available should the spouse in a care facility need additional or specialized medical treatments that are not covered by Medicaid. If your spouse develops cancer while in an assisted living or skilled nursing facility and you wish to have her seen at the best cancer center in town, Medicaid likely will not be sufficient, or event accepted. In that case, it will be even more important to have assets available to pay for expensive treatments that will not otherwise be covered.
Even if the institutionalized spouse does not experience a specialized medical condition, having assets set aside and not depleted to qualify for Medicaid will be useful for improving his or her quality of life. Costs for things that make life better, like gifts, entertainment or other hobbies that your loved one enjoys can be covered using the funds in a special needs or supplemental needs trust. These would not be available should you have to pay down your assets to receive Medicaid coverage.
Finally, special needs planning is important for ensuring that your spouse can continue to receive the care that you have been providing for him or her. Although it is a difficult decision when you realize that your loved one needs more than what a single person can offer, you can take steps to ensure that the care he or she receives from an assisted living or skilled nursing facility is at the level of quality that you would provide for your spouse if you could. The best way to make sure that this is true in your circumstances is to create a sound special needs plan with the help of a qualified professional.
What are the risks of this type of planning?
While special needs planning can be extremely useful and beneficial, there are risks associated with these kinds of arrangements that you should be aware of when considering your own plans for the future.
Improper trust funding
One of the biggest risks in special needs planning is improper trust funding. The reason these trust options allow you to avoid spending down to qualify for Medicaid and the other benefits mentioned above is because of how they are funded. They cannot be funded with the beneficiary's own assets; otherwise, they will be considered for determining benefits eligibility.
Along this line, the biggest mistake that people often make is titling inherited assets in name of institutionalized spouse and then trying to use those assets to fund the trust. In this situation, the spouse receiving care will likely lose Medicaid coverage because their net worth is too high, forcing them to use their inherited wealth to pay for the cost of their care.
Selecting the wrong trustee
Another common mistake in this realm is selecting the wrong trustee for your special needs or supplemental needs trust. Because the creation and administration of these trusts is critical for maintaining benefits and avoiding loss of coverage, it's important to name a trustee who understands the nuances of the applicable laws. Often, people will name someone as trustee who lacks knowledge and understanding of the benefits being received by the institutionalized spouse. In this circumstance, it's far too easy for that person to make a well-intentioned mistake and ruin the plan you've created to ensure your spouse has the care she or he needs for years to come.
Improper trust administration
Similarly, it's unfortunately very easy to mismanage a special needs or supplemental needs trust and end up causing the beneficiary to lose their Medicaid coverage. This is because there are specific rules about how the assets in these trusts can be used. You cannot provide the beneficiary with funds from the trust without putting benefits in jeopardy. Instead, the trustee should only use the trust assets to provide goods and services not covered by government benefits. This can include travel, entertainment, meals out, or other non-essential items that can be used to improve your spouse's quality of life.
Medicaid agency claiming either disqualification or payback requirement
Finally, the greatest risk with special needs planning is that, if done incorrectly, the government will do anything it can to claim that your spouse is disqualified from Medicaid coverage, or it will go after your spouse's estate to payback the value of services provided. The best way to avoid either scenario is to seek an experienced estate planning attorney to assist you with your special needs planning. He or she will be well-versed in the intricacies of these laws and can set up a plan that specifically addresses these risks to avoid having your spouse lose coverage or the inheritance they plan to leave behind.
Overall, special needs planning is critical for ensuring your spouse has the care and supplemental resources he or she needs to live a high-quality life, even if he or she requires the added support of an assisted living or skilled nursing facility.
In addition, estate planning involves preparing for life events and unpredictable outcomes. People sometimes pass away “out of order,” and your plan needs to address that possibility. When only one spouse is in a care facility, many people would expect for that spouse to pass away first. A third-party supplemental benefits trust provision in the community spouse's estate plan can be valuable when that presumption turns out to be wrong.