Jan 18, 2008

Special Needs Trusts for the People

A few years ago, I taught a "distance learning" estate planning course for Barnes and Noble.com. I created an online curricula, assigned reading in the designated textbook (Nolo's excellent Plan Your Estate, by Denis Clifford and Cora Jordan), and answered questions via an email bulletin board. The course was fun, but I kept getting questions about special needs trusts about which I was clueless.

Intrepid instructor that I was, I turned to the textbook (Plan Your Estate), confident I would be enlightened. At the time there was one small paragraph on the subject, to this effect: Special needs trusts are too complex to do yourself. Get a lawyer. Hmm. Every Nolo book has statements like this when the author believes self-help is inappropriate for the circumstance. Fair enough. However, since I was teaching the Barnes and Noble course, I had to do better than that, so I set out to research the topic. But before I continue, I should bring everyone up to speed about what I'm talking about.

Special needs trusts are devices that allow people with disabilities to enjoy the benefits of gifts, inheritances, and personal injury awards without running afoul of the stringent resource limits imposed on recipients by the Supplemental Security Income and Medicaid programs. The property in the trust can be used for a variety of purposes beneficial to the disabled person (for example: vacations, college tuition, caretakers, periodicals), as long as the trust property isn't spent on items already provided by those government programs.

The first thing I learned from my research is that special needs trusts are commonly thought to be so complex that only a lawyer should draft them. And the complexity is thought to be so great that it's okay for lawyers to typically charge $1500 and up for the pleasure. The next thing I learned (and this won't come as surprise to those who know the history of Nolo) is that the type of special needs trust most needed by the populace, and most often prepared by lawyers in the field, is not at all complex and can easily be done without a lawyer's tender ministrations.

The simple type of trust is where a third party, for instance a parent or grandparent, leaves property directly to the trust rather than to the child. In this way, the trust owns the property and the child continues to receive the government benefits. The reason this type of trust doesn't need a lawyer's tender ministrations is that since the trust property never belongs to the beneficiary in the first place, it is virtually impossible for the government to break the trust, unless the trust has language that gives the trustee the wrong type of discretion. "Aha," the lawyers might say, "it's just that type of technicality that requires a lawyer to do the drafting." But the language that makes a special needs trust airtight is just a few sentences that are the same type of boilerplate that is found in wills, living trusts, and other estate planning documents -- documents that people have been preparing without lawyers for the past half-century.

In case you're wondering, there are some situations where the lawyers are right and it's worthwhile to pay a lawyer to draft a special needs trust. This is when the money going into the trust belongs to the beneficiary from the get go. The reason why this is more complex than when property goes directly to the trust is that you are transferring the recipient's property to the trust to make him or her eligible for government benefits. Understandably, broke state governments are suspicious of these transfers and do everything in their power to break them. And if they are broken, the money will be considered a resource that will force the beneficiary to spend down the money before he or she can once again be eligible for SSI and Medicaid.

Anyway, back to my story. Part of my research disclosed that the hundreds of thousands of parents of children with disabilities who would benefit from a simple special needs trust couldn't afford to pay for one (or maybe just wouldn't because they didn't trust lawyers). Since this type of simple trust is easy to draft, involves less choices and variables than do wills and living trusts, and can be explained in plain English, I decided to write a book on the subject (Special Needs Trusts: Protect Your Child's Financial Future, by Stephen R. Elias (Nolo)). The book is now in its second edition and doing well.

I expected to be attacked by the special needs trust cartel when the first edition came out, but no such luck. Maybe I'll take on the more complex type of trust in my third edition, just to get the goat of all those lawyers who grossly overcharge their clients for the simple type of special needs trust.