Common Mistakes in Special Needs Planning

Planning for a loved one with special needs requires careful consideration to ensure their financial security, access to benefits, and overall well-being. A well-structured special needs plan provides long-term stability, but even small mistakes can lead to unintended consequences, such as disqualification from government benefits or mismanagement of assets.

Understanding common special needs planning mistakes can help families avoid costly errors and create a plan that truly benefits their loved one. If you need assistance with your special needs plan, contact us online or call 414-253-8500.

1. Failing to Create a Special Needs Trust

One of the biggest mistakes families make is leaving money or assets directly to a loved one with special needs. This can disqualify them from Supplemental Security Income (SSI) and Medicaid, which have strict asset limits. Instead, families should establish a special needs trust (SNT) to hold assets for their loved one without jeopardizing eligibility for government benefits.

Types of Special Needs Trusts

• First-Party SNT: Funded with the individual's own assets, often from an inheritance, settlement, or lawsuit.
• Third-Party SNT: Created by parents or other relatives to hold assets for the individual's benefit.
• Pooled SNT: Managed by a nonprofit organization and combines multiple beneficiaries' funds while maintaining individual accounts.

Without a properly drafted special needs trust, the beneficiary may face financial hardships or lose essential public assistance. Learn more about different trust options, including revocable and irrevocable trusts.

Comparison of Special Needs Trusts

Type of Trust	Funded By	Purpose	Medicaid Payback Requirement	Best For
First-Party SNT	Individual with special needs (inheritance, lawsuit, etc.)	Preserves benefits while managing personal assets	Yes - Medicaid reimbursement required upon death	Individuals receiving large sums of money
Third-Party SNT	Parents, family, or friends	Provides financial support without affecting benefits	No - Funds can be distributed to other heirs	Families planning for a loved one's future
Pooled SNT	Individual or third party	Managed by a nonprofit; combines multiple beneficiaries' assets	Depends on funding source	Those who prefer professional management of funds

2. Naming the Wrong Trustee

Choosing the right trustee is crucial for managing a special needs trust. Many parents assume they should act as trustees, but they may lack the legal or financial expertise to handle complex trust administration.

Mistakes to Avoid When Choosing a Trustee

• Appointing a Sibling Without Experience: A well-meaning family member may struggle with financial management or legal compliance.
• Not Considering a Professional Trustee: Banks, attorneys, or trust companies can provide expertise but may lack a personal connection.
• Failing to Name a Successor Trustee: Without a backup trustee, the trust could be left unmanaged if the primary trustee becomes incapacitated or passes away.

A trustee has significant responsibilities, including managing trust assets, making distributions, and ensuring compliance with SSI and Medicaid rules. Learn more about trustee duties and liabilities.

3. Overlooking Government Benefit Eligibility

Many families fail to structure their plan in a way that preserves the individual's eligibility for Medicaid, SSI, and other public assistance programs. Mistakes that can lead to benefit disqualification include:

• Leaving an inheritance directly to the individual instead of placing it in a trust.
• Failing to account for income and asset limits when setting up financial gifts or payments.
• Not structuring life insurance or retirement accounts correctly, leading to a lump sum disbursement that exceeds asset limits.

Proper planning ensures that a loved one can receive both government benefits and additional financial support from a special needs trust.

4. Failing to Plan for Housing and Care Needs

Long-term housing and care are critical aspects of special needs planning. Many families assume that their loved one can continue living in the family home indefinitely, but circumstances may change.

Common Housing Planning Mistakes

• Not considering long-term housing solutions, such as group homes, assisted living, or independent living programs.
• Failing to transfer home ownership properly, which could create financial and legal complications.
• Not funding a trust to cover future housing costs, leading to financial insecurity.

Working with an attorney can help ensure that housing arrangements align with the individual's long-term financial and care needs.

5. Assuming a Will is Sufficient

Many families believe that leaving assets to a loved one with special needs through a will is sufficient. However, a will only dictates how assets are distributed after death-it does not provide ongoing financial management or protect public benefit eligibility.

Why a Will Alone is Not Enough:

• Assets left directly to the individual can disqualify them from Medicaid and SSI.
• A will does not allow for controlled distributions, meaning the individual may receive a lump sum that is mismanaged or spent too quickly.
• A special needs trust (SNT) is a better alternative to ensure assets are managed properly while maintaining benefit eligibility.

To learn more about proper estate planning tools, visit our page on wills and trusts.

6. Failing to Update the Plan Over Time

A special needs plan should evolve as laws, financial situations, and care needs change. Many families make the mistake of creating a plan and then failing to review or update it regularly.

Key Times to Review and Update a Special Needs Plan:

• Changes in Government Benefit Rules - SSI, Medicaid, and other programs have evolving regulations that could impact eligibility.
• Major Life Events - Marriage, divorce, births, deaths, or changes in financial circumstances can affect the plan.
• Trustee or Guardian Changes - If a named trustee or guardian is no longer able to serve, replacements must be designated.
• Legislative Updates - Tax laws and estate planning regulations can change, requiring modifications to ensure compliance and tax efficiency.

Regular check-ins with an estate planning attorney can help keep a special needs plan up to date and effective.

7. Forgetting to Name a Guardian or Caregiver

Parents and guardians of a child with special needs must consider who will provide care and advocacy in the future. Failing to name a legal guardian or caregiver in an estate plan can leave the individual vulnerable to court-appointed guardianship, which may not align with the family's wishes.

Steps to Appoint a Guardian or Caregiver:

1. Legally designate a guardian in estate planning documents.
2. Discuss the role with potential guardians to ensure they are willing and capable.
3. Consider backup guardians in case the primary choice is unable to serve.
4. Document the individual's care preferences in a letter of intent to guide future caregivers.

A well-structured plan should address both financial and personal care needs to ensure long-term stability.

8. Not Coordinating Beneficiary Designations

Many families fail to align beneficiary designations on assets such as:

• Life insurance policies
• Retirement accounts (401(k), IRA, pensions)
• Bank accounts

Common Beneficiary Mistakes:

• Naming the individual with special needs directly - This can result in disqualification from benefits.
• Forgetting to update designations after establishing a special needs trust.
• Leaving assets to a sibling with the expectation they will use them for the individual's benefit - This can create legal and financial risks.

The best practice is to name the special needs trust as the beneficiary to protect eligibility for government programs. For more details, visit our page on beneficiary designations.

9. Failing to Consider Medicaid Payback Rules

If a first-party special needs trust (funded with the individual's own assets) is used, Medicaid payback rules may apply. This means that upon the beneficiary's death, any remaining funds may have to be reimbursed to Medicaid for services provided during their lifetime.

How to Avoid Medicaid Payback Issues:

• Use a third-party special needs trust, which does not require Medicaid reimbursement.
• Work with an attorney to structure the trust properly based on the individual's needs and available assets.

For more information on protecting assets, read about Medicaid asset protection trusts.

10. Attempting DIY Estate Planning

While DIY estate planning tools and online templates may seem cost-effective, they often fail to address the complexities of special needs planning. Common issues with DIY planning include:

• Improperly drafted trusts that fail to comply with SSI and Medicaid rules.
• Missing legal provisions that protect assets from misuse or mismanagement.
• Lack of coordination between estate planning documents and government benefits.

An experienced attorney can help families navigate the legal and financial intricacies of special needs planning to avoid costly mistakes.

Contact a Special Needs Planning Attorney

Avoiding these common mistakes is essential to securing your loved one's future while maintaining their eligibility for government benefits. A properly structured special needs plan ensures financial security, ongoing care, and peace of mind for both you and your family.

For legal guidance on special needs trusts, guardianship, and estate planning, contact us today or call 414-253-8500.

Common Mistakes and How to Avoid Them

Mistake	Why It's a Problem	How to Avoid It
Leaving assets directly to the individual	Can disqualify them from SSI and Medicaid	Set up a special needs trust
Naming the wrong trustee	Mismanagement of funds or legal issues	Choose a qualified trustee with experience
Failing to update the plan	Changes in laws or family circumstances can make the plan outdated	Review the plan regularly with an attorney
Not coordinating beneficiary designations	Funds may be improperly distributed, affecting benefit eligibility	Name the special needs trust as the beneficiary
Assuming a will is enough	A will alone does not protect benefits or provide asset management	Use a trust in addition to a will

Frequently Asked Questions (FAQs)

1. What is the purpose of a special needs trust?

A special needs trust (SNT) is designed to provide financial support to an individual with disabilities while preserving their eligibility for government benefits like Supplemental Security Income (SSI) and Medicaid. Assets in the trust can be used for expenses not covered by these programs, such as housing, education, and medical care.

2. Can a person with special needs inherit money directly?

Yes, but it can result in the loss of government benefits like Medicaid and SSI, which have strict asset limits. Instead, funds should be placed in a special needs trust, which allows for financial support while maintaining benefit eligibility.

3. Who should serve as the trustee of a special needs trust?

A trustee should be someone who is financially responsible and understands the rules governing special needs trusts and government benefits. This could be a family member, a professional trustee, or a corporate trustee. In some cases, a combination of a family member and a professional trustee may be the best solution.

4. How often should a special needs plan be updated?

A special needs plan should be reviewed at least every few years or whenever there is a major life change, such as a birth, death, marriage, or change in government benefit rules. Keeping the plan up to date ensures ongoing protection for the individual with special needs.

5. What happens to a special needs trust when the beneficiary passes away?

It depends on the type of trust:

• A first-party SNT (funded with the beneficiary's own assets) may be subject to Medicaid payback rules, meaning any remaining funds must be used to reimburse Medicaid for services provided.
• A third-party SNT (funded by parents or relatives) does not have Medicaid payback requirements, and any remaining funds can be distributed to other heirs as designated in the trust.