You have a grandchild, or niece or nephew, with a developmental disability. You’d like to leave him (or her) some money in your will. Do you need to create a special needs trust for your nephew?
The basic rule
First, let’s be clear. Please do not leave your nephew any money outright. Say, for example, that you really like him, and want to let him know about your warm feelings for him. Your will says “I leave $20,000 to my nephew Brent.” That’s very nice.
Except that you just knocked him off of Supplemental Security Income (SSI) if he receives it. You probably also caused problems for his Medicaid eligibility. And if his disability affects his ability to manage money, you might also have triggered a court proceeding.
This is the same rule that applies to your sister, his mother. If she leaves him money outright, she will also cause problems for him. But she can also create those problems by doing nothing — because he is probably one of her heirs. If she fails to write a will (or create a trust) at all, Brent’s benefits are at risk.
That’s your second important rule: you need to keep urging your sister to do her own estate planning. Brent needs her to do that.
So do you have to create a special needs trust?
Maybe not. There are a number of ways you can get money and benefits to your nephew, and only some of them involve you creating a special needs trust. Here are a few:
- You can leave money to an existing trust. Did your sister create a special needs trust for Brent? Your will could say “I leave $20,000 to the Brent Special Needs Trust Dated May 25, 2020.” You need to get the actual name of the trust from your sister, of course — and it might be good to name the trustee (at least the current trustee) of that trust, too. But the idea works.
- If your sister’s will creates a special needs trust for your nephew, can you leave your gift to that “testamentary” trust? Yes — but only if your sister dies before you. That trust won’t exist until her death, so there’s no trust to receive your inheritance if you die first.
- You might be able to use a pooled special needs trust, or even an ABLE Act account — though that last one is only available if you intend to leave Brent less than $17,000 (this year, anyway).
Can I create a trust for my nephew?
Of course. Your estate plan will probably be a little more expensive, and the documents a little more complicated. But nothing stops you from creating a special needs trust for Brent. You have two choices:
- You can create a “testamentary” special needs trust. That just means that your will includes provisions for who will manage the money and what terms they will need to follow. This is not something you should try to do for yourself, by the way — this is a time for you to get good legal advice.
- You can create a stand-alone special needs trust — just like the one your sister should have already created. In fact, you can set up that trust and help simplify your sister’s choices. She can then leave her estate (or part of it) to Brent’s special needs trust — the one you created for her. You saved her some money, and some trouble! You’re a good person.
What if it’s not my nephew?
Our explanation applies to your nephew. Or your niece. Or your granddaughter/grandson. Even the neighbor’s kid that you just really like.
In other words, there’s no particular requirement or limitation about setting up a special needs trust for someone you want to benefit. In fact, there’s not even a requirement that they be disabled. You might think they just need assistance managing money. Or they might be immature, or inclined to spend the money in ways you don’t want to encourage.
Suppose, for instance, that your nephew is the classic “failure to launch” kid, living with your sister and her spouse at age 30 and not moving toward independence. But he’s never been found to be disabled, and isn’t getting government benefits. Can you still leave money in trust for him?
Absolutely. The hardest part might be finding a trustee who you know will apply the same kind of logic you would to making distributions. Want to encourage him to get some job training? Your trust can spell that out. Worried about his abuse of alcohol or drugs? You can limit distributions from the trust you establish.
Maybe you think he could qualify as disabled if he would get evaluated and apply for benefits. Your trust can encourage your nephew to follow through. In other words, there is terrific flexibility — you should talk with your estate planning attorney about your options and goals.
What could possibly go wrong?
Lots. Here are the things we see most often:
- You create a special needs trust for your beneficiary, and then you name him as payable-on-death (POD) beneficiary on your bank accounts. You just left the money to him outright — it doesn’t go to the trust unless you make the trust the beneficiary instead. Same thing for your life insurance, your retirement account, etc. We see it all the time: careful planning in the documents, but no planning on the beneficiary designations.
- You create the special needs trust, then think you’re done. You really need to revisit the trust every few years (how many? we suggest about five) to make sure it’s still the right way to benefit your nephew.
- You create a special needs trust. So does your sister, and her ex-husband. Also your sister’s ex-husband’s parents. So now there are four different trusts, with different trustees and different language. Who will pay for the car repair your nephew needs, or for his tuition? How will the various players coordinate?
- You use too-restrictive language, or outdated provisions, or vague language in your trust. To be fair, these problems are more common when people write their own trust language; your estate planning attorney can probably recommend some better alternatives.
- You fail to name a back-up trustee. It’s often hard to find enough candidates for the role of trustee — which, to be clear, is not so much an honor as it is a burden. But it’s a rewarding burden, so go ahead and ask your brother’s daughter if she would be willing to act as backup trustee for her cousin. She might be a great candidate!
To summarize:
Yes, you can create a special needs trust for your nephew (or niece, or grandchild, or neighbor’s child). It’s a kind and thoughtful thing to do. You might even be able to benefit your sister/brother/child by creating the current trust document they need for their own estate plan. And a well-drafted trust will improve your nephew’s quality of life.
You’re a mensch for doing this. We applaud you.
