Special Needs Trusts versus Revocable Living Trusts: Which Are Right for Your Family?
After you’ve spent your lifetime earning and saving an income to provide for your family during your life and beyond, it’s important to choose the estate planning tools that will help your money go as far as possible. Trusts come in many shapes and sizes, each with different intended uses for the varying needs of both the trusts’ creators (grantors) and those who benefit from the trusts (beneficiaries).
Two common types of trusts used in Washington estate plans are Special Needs Trusts and Revocable Living Trusts. These trusts have very different strengths and intended purposes. Learn more about Special Needs Trusts and Revocable Living Trusts below, and find out what makes each one helpful in different ways. A Vancouver trusts and estates lawyer can help you decide which trust would be best for meeting your family’s needs.
When to select a Special Needs Trust
Special Needs Trusts are designed to provide financial support for beneficiaries with physical or mental disabilities receiving state or federal benefits. Normally, if someone receiving public benefits received a large sum of money or other assets through a will, trust or lifetime gift, the size of the gift would disqualify them from those government benefits, such as Medicaid, Supplemental Security Income (SSI), or Social Security Disability Insurance (SSDI). However, these benefits are often an indispensable part of allowing the recipient to live comfortably, pursue a new course of study or obtain advanced medical care.
A Special Needs Trust offers a way for the beneficiary to continue to receive public benefit payments while also receiving income from the trust that may be used for limited purposes. These purposes can include medical expenses, education costs, the costs of a home or car, home furnishings, life insurance policies, and items to be used for self-support (i.e., to support the beneficiary’s small business or employment). Additionally, by putting funds in a trust rather than giving them directly to the special-needs person, there is a built-in method of providing financial management help for the beneficiary from the trustee.
Special Needs Trusts can be either third-party trusts or first-party trusts. A third-party Special Needs Trust is an irrevocable trust set up by the beneficiary’s family members or loved ones, often as part of an estate plan. A first-party, or self-settled, Special Needs Trust is one that is funded by the beneficiary’s own money. Some typical sources of these funds are settlements or payouts resulting from personal injury lawsuits, inheritances after the death of a loved one, or proceeds from a divorce. Unlike third-party Special Needs Trusts, if funds are remaining in a first-party trust when the beneficiary passes away, they will need to be used to reimburse Medicaid.
Revocable Living Trusts: Designed for privacy and avoiding probate
Revocable Living Trusts are as different from Special Needs Trusts as they can be. Unlike Special Needs Trusts, the revocable nature of these trusts means that they are not useful for asset protection. Instead, the primary purpose of Revocable Living Trusts is to protect your heirs from the trouble of going through probate. Since probate can be time-consuming, a Revocable Living Trust ensures that your heirs will get to benefit from your property sooner after you pass away. If you own property in states outside of Washington, a Revocable Living Trust will also save your heirs from the trouble of going through probate in other states when you die. Unlike a will, the contents of a Revocable Living Trust do not become public after the grantor dies, offering an additional measure of privacy.
A Revocable Living Trust also offers grantors a method for identifying someone to manage their assets after they are no longer able to do so competently. If all of the grantor’s assets are held in the trust, and the grantor has selected a capable trustee, then the grantor will have a built-in guardian of their affairs should they become disabled physically or mentally as they grow older. This can help the grantor avoid a guardianship proceeding, where family members are forced to go to court to have a guardian selected who can manage the incapacitated person’s affairs when they are unable.
If you have questions about Special Needs Trusts, Revocable Living Trusts, or other estate planning instruments and how they could benefit you, contact the Vancouver offices of John Lutgens for a consultation on your Washington estate plan.