Special Needs Planning Newsletter: The Classic Cars of Special Needs Planning
by Peter Harrison, Special Needs Planning Attorney
Tennessee is one of the nation’s foremost states in trust law. In that body of law, one of the most powerful tools available to families involved in special needs planning is decantation. Decantation is the process of transferring property in one trust to a new trust for some or all of the trust’s beneficiaries. Like turning an old clunker in the yard to a head-turning beauty on the streets, decantation can give new life to an old trust. We’ll show you how.
Comparing the Options
First, let’s take a look at the options. There are five types of trusts to hold assets for beneficiaries with special needs:
- General support trust
- Third party special needs trust
- Three statutory first party trusts—being (c)(2)(B); (d)(4)(A); and (d)(4)(C)
First Party Trusts
First party trusts are an attractive option for individuals who need benefits, such as Medicaid or SSI, but have too many assets to qualify for the benefits. For example, if someone has assets (i.e. property, a car, investment funds, cash) above the maximum allowed to qualify for certain benefits programs, then that person can use a first party trust to hold the assets in order to avoid loss of eligibility for benefits or care. These trusts have very specific requirements based on the statutes authorizing the first party trust. So, when comparing different trust options, it’s important to keep in mind that first party trusts are different than third party trusts.
General Support Trusts
General support trusts are created with the purpose of meeting someone else’s support needs; however, these trusts usually do not always take into account the beneficiary’s special needs or the potential effects the trust may have on the beneficiary’s eligibility for benefits. We’ll explain.
General support trusts are extremely common, and the trust funds are often specifically used for the beneficiary’s health, support, or maintenance costs. Years ago, when the estate tax exemption was much lower and the tax rate much higher, a common tactic for avoiding unexpected estate tax consequences was to restrict use of the trust’s funds for the beneficiary’s health, education, maintenance, and support costs. The restrictive standard avoided some estate and gift tax issues, but caused the trust to become a general support trust. In addition, trust drafters frequently designed trusts to endure so the fund would endure through future generations. However, many failed to account for the possibility of the children, or young or unborn grandchildren having or developing a special need. If a person with special needs is the beneficiary of a general support trust, then all the funds in his or her trust must be spent on his or her general support. Benefits like Medicaid or SSI aren’t available until the general support trust funds are used entirely.
Third Party Trusts
Third party trusts are set up by individuals who do not need care for themselves but instead want to make sure a beneficiary can keep the trust’s assets and eligibility for benefits. Unlike general support trusts that allow beneficiaries to request funds, third party trusts deny the beneficiary the option of demanding funds for support or care needs. As a result, the assets of a third party special needs trust are not taken into account when a beneficiary is seeking eligibility for benefits like Medicaid. So, the beneficiary can obtain the benefits AND also have assets from the trust available for needs not covered by a benefits program. Since programs like SSI and Medicaid are designed to cover only the bare-essentials for living, a third party special needs trust can be the difference between a decent standard of living and living in utter poverty.
From Clunker to Classic
Decanting allows a trustee to transform a general support trust to a third party special needs trust. Thanks to this rule, a trustee in Tennessee can shelter thousands of dollars of assets that would otherwise have to be spent down on care and give the beneficiary access to programs for which he or she was previously ineligible. If you have a trust in your family and have a family member with special needs, you owe it to yourself and your family to make sure that the trust you thought was a clunker isn’t really just waiting to become a classic.
If you have any questions about special needs planning, please reach out to Peter or a member of the Special Needs Planning Team. We are just a call or email away.