Video Transcript Below
Introduction
00:13:33
Michelle Dexter: I’m so excited that you guys are joining us today. I want to apologize in advance — I lost my voice about ten days ago and it’s still coming back. I’m going to do my best to speak clearly and not cough too much. For those of you who don’t know me: I’m Michelle Dexter, attorney at law. I’ve been at Keystone Law Firm for eight years. We specialize in estate planning, probate work, guardianship, conservatorship, trust administration — those types of things. I’ve been an attorney for over twenty years now, and I really enjoy working at Keystone and the help we’re able to provide our clients and their families. We’re excited to bring these webinars and specialized training and education to the community so people can understand what to look for and learn whether they can use some of this information in their own estate plan. Okay.
What we mean by “special needs”
00:14:34
Michelle Dexter: Today we’re going to be talking about special needs planning for children and grandchildren. What we find is that a lot of times people don’t plan, and what they think they’re leaving as a gift to their beneficiaries ends up being more of a burden. We want to make sure we’re addressing those things appropriately so we’re setting everybody up for success and your assets are used the way you intended.
When we talk about special needs, generally we’re talking about individuals who require specialized support and services and who could be entitled to government benefits to help pay for those things. Some beneficiaries are born with certain conditions — that could be autism, Down syndrome, cerebral palsy, intellectual disabilities, and many other disabilities that can require extensive medical care.
Other times, people acquire disabilities during their lifetime. That can be in the form of a stroke, dementia, schizophrenia, blindness, COPD, PTSD — the list goes on. Disability doesn’t always mean “special needs,” though. People who have dyslexia or ADHD aren’t necessarily categorized as special needs in this planning context; they aren’t necessarily going to qualify for government benefits because of those conditions. We’re specifically looking for people who are eligible for government benefits that help provide their support.
That support can be for living expenses, medical insurance, food, therapies, counseling — things they can’t provide for themselves. These benefits can be critical to preserving a decent quality of life.
Government benefits — disability-based vs. means-tested
00:15:41
Michelle Dexter: When we look at government benefits, I categorize them in two different types. First, there are disability-based benefits. If you have a disability that limits or prohibits your ability to work, you might be entitled to Social Security Disability Insurance (SSDI). SSDI is based on having a qualifying disability plus prior work history where you’ve paid into the program. Those people typically receive a monthly payment and are generally pretty liberal in how they can use those payments, although full-time future employment can impact eligibility and payment amounts.
Where we are more concerned is with means-tested benefits. Means-tested benefits look at the means the individual has to pay for their own care — income and assets. For example, Arizona’s Alttech system, which is the Medicaid program for people over the age of 65, requires eligibility based on age, U.S. citizenship, a medical qualification, and limits on income and assets. Right now that asset limit is $2,000, which is not very much, so almost any inheritance could disqualify someone.
Once qualified for those benefits, beneficiaries are typically required to re-qualify periodically and the government can audit their bank accounts. It’s important to follow the rules of the benefits program.
Those benefits can cover things like housing, food, health insurance, making modifications to the home, long-term care, in-home care, and vocational services to improve quality of life. Often, people rely on those therapies and supports to maintain their ability to live independently, and losing those benefits can be devastating. It can take a long time to get qualified, and losing them can be catastrophic.
How it can go wrong
00:19:15
Michelle Dexter: If your estate plan or trust doesn’t address a special needs beneficiary and that person is set to receive an inheritance, they can’t simply refuse the inheritance to keep their benefits. From the government’s standpoint, if you have money available to pay for your own care, you should be paying for your own care. A beneficiary can’t disclaim an inheritance in a way that preserves eligibility for means-tested benefits.
So, if a beneficiary receives an inheritance, it can disqualify them from benefits. They may then have to “spend down” the inheritance to regain eligibility — which can take a long time. I had a client whose brother took three years to get re-qualified for benefits after losing them. Re-qualification can be a lengthy, difficult process.
With Medicaid programs (and similar benefits), there’s often a look-back period — commonly five years — to examine how money was spent. You’re prohibited from giving away money or spending it in ways that the government deems improper to try to re-qualify. If the spending looks suspect, you can be penalized and end up without benefits and without the inheritance for some time. It’s a delicate balance we try to avoid.
Planning strategies — three categories
00:22:35
Michelle Dexter: There are a few different ways to provide special needs planning. I group them into three categories.
1) Backup language. This is for situations where you’re not directly giving to a beneficiary who has special needs, and it’s not your intention that they receive anything. For example, you might leave everything to your children, and a grandchild with special needs is down the line. I might include backup special needs language in the plan in case that grandchild ends up receiving an inheritance. I work in worst-case scenarios and want to make sure we aren’t ignoring the fact that someone downstream could have special needs and might need extra protection.
In that case, we aren’t saying the child is receiving a special needs trust because the child doesn’t need it; but if the grandchild ever becomes a beneficiary, we have backup language to protect benefits.
2) Include the special needs language. This is when you are giving to someone who does have special needs or who might reasonably qualify for benefits in the future. For example, I have great-nephews on the autism spectrum who are both under four years old. I don’t know how they’ll function as adults. You can include language that says if they’re receiving benefits when they become beneficiaries, their share will be handled as a special needs trust.
When creating a trust, you can direct that beneficiaries receive their share outright, receive it in a protected beneficiary subtrust, or receive it in a special needs trust. A special needs trust must contain the language benefits programs look for so the trust qualifies. Putting the funds into a typical trust or subtrust without the specific language won’t protect benefits.
With a special needs trust, the beneficiary is not their own trustee; the trustee is limited in how funds can be used. The funds aren’t intended to replace government benefits; they’re intended to improve the beneficiary’s quality of life — to supplement, not supplant, the benefits.
3) Standalone special needs trusts. These are separate trusts set up solely for the beneficiary’s benefit. There are two main types: first-party and third-party special needs trusts.
First-party (D4A) special needs trusts
00:27:06
Michelle Dexter: A first-party special needs trust — often court-approved — is used when a beneficiary who receives benefits also receives an inheritance or a settlement (for example, a medical lawsuit settlement or insurance payout). These trusts allow the beneficiary to have the funds placed into a trust and preserve eligibility for benefits, but they typically require that remaining funds at the beneficiary’s death be used to reimburse the government for benefits paid out.
These are pursuant to federal code and are often referred to as a D4A trust. We get them approved by the court and coordinate with Medicaid. I used a D4A trust for a daughter who was born with developmental issues and had never been self-sustaining. Her parents hadn’t set anything up, and when both parents died she was set to inherit. We went to court and created a D4A trust so she could have the benefits she needed for ongoing care while also accessing the parents’ funds to improve her quality of life during her lifetime.
When she’s done using the assets, anything left first reimburses Medicare and Medicaid for what they’ve paid, and anything after that goes to the other beneficiaries that would have inherited.
I also had a client whose medical malpractice settlement required funds to be placed in a D4A trust. Even though she could qualify for benefits and might prefer direct control of the money, she won’t have direct control because the court-approved trust protects both her and the government.
D4A trusts can be used for people under 65 who are disabled, but they have the downside that leftover funds generally reimburse the government rather than continuing with the family.
Third-party special needs (or supplemental) trusts
00:30:41
Michelle Dexter: Third-party special needs trusts are what many families prefer. A parent or grandparent can create a third-party special needs trust for a special needs beneficiary, and anyone can contribute to it — parents, grandparents, aunts, uncles, whoever. The person who creates the trust directs where any leftover funds go after the beneficiary no longer needs them.
This is an important difference from first-party trusts: third-party trusts allow funds to continue to other family beneficiaries.
In my great-nephews’ case, their parents created standalone special needs trusts for them. The trust currently says that when the parents pass, a certain interest will go into that special needs trust, but grandparents can also name that special needs trust as a contingent beneficiary, so money doesn’t accidentally go directly to the grandchild and jeopardize benefits.
I had a case where grandpa had special needs language in his will for a grandson, but because most assets passed outside of probate directly to beneficiaries, nothing actually went through the will. The son was upset because the will’s intent was defeated, so he set up a special needs trust for his nephew and funded it. That achieved the intent of the will even though probate didn’t play out that way.
One downside to leaving everything to one child with the expectation they’ll distribute it to others is that when that child distributes funds, it’s treated as a gift from that child to the recipient, not an inheritance directly from the parent. Depending on amounts, that could trigger a gift tax filing requirement or other issues, so funding and transfers need to be planned strategically to avoid tax complications.
“Special needs” vs. “supplemental needs”
00:34:18
Michelle Dexter: You may hear the terms “special needs” and “supplemental needs” used interchangeably. In the last couple of years there’s been a shift toward using “supplemental needs” instead of “special needs.” These documents are largely the same, but “special needs” can carry an implication of reimbursement to the government agency that paid benefits. “Supplemental needs” doesn’t have that same implication, and some families prefer the term to avoid expectation of government reimbursement. When we create third-party trusts, we often use the term “supplemental needs trust.” Just know they’re often accomplishing the same goals.
Final thoughts and next steps
00:35:36
Michelle Dexter: Planning is key. Consider backup language if you have a family history of disabilities. You don’t necessarily need evidence today, but some conditions can be inherited, so be mindful of potential future conditions in your children or grandchildren.
We had a woman who suffered a very severe stroke and became completely incapacitated; we had to go to court and get a guardian and conservator because she had no paperwork in place. If she stands to inherit anything, there’s a good chance she will qualify for benefits after spending down assets on healthcare. We want to plan ahead.
Review and update your estate plan regularly. For our trust clients, we like to see you every year and ask “How are the kids doing? How are the grandkids? Any changes?” Those are the triggers for us to consider backup language or special needs language.
If you come to us and say, “My son has a significant health problem and I am concerned because he hasn’t been able to work and his resources are getting low,” that tells us we should explore whether he might qualify for government benefits and whether we need to follow up and plan more closely.
00:36:47
Michelle Dexter: Your documents can provide for termination of the special needs trust if the beneficiary does not need that protection. Putting special needs language in when you’re unsure can include a “get-out” provision. For example, you can say that if the beneficiary is self-sufficient — working full time and paying their own expenses for three years (or another defined period) — the trustee may, if it’s in the beneficiary’s best interest, terminate the special needs portion of the trust. That lets the trustee assess the totality of the situation and make a reasoned decision rather than having an automatic cutoff.
00:37:45
Michelle Dexter: We’ll pause here and have time for questions if anyone has any.
00:38:42
00:39:44
Michelle Dexter: Okay. What we need to know is that your trustee can’t add special needs language to your estate plan in the future. So, it’s important to have those awkward conversations with your family and understand how certain benefits are impacting them. A lot of times I talk to families where the kids don’t talk to the parents about finances, and the parents don’t always talk to the kids either. But if you can look at it as a legal decision with your paperwork, it hopefully feels less like being nosy and more like doing what’s best for your beneficiaries. That way, we make sure they’re set up properly.
One thing to keep in mind: planning for special needs in your estate plan is not the same as addressing the need for a guardian when a disabled individual turns 18. We do many graduating high school senior events to ensure they have healthcare powers of attorney and HIPAA authorizations in place.
00:40:58
Michelle Dexter: If you have a child who is 17 and a half, disabled, and will need a guardian, you can actually apply for guardianship at 17 and a half so it’s in place by age 18 without a gap in coverage. Many of these disabilities are medically intensive, and we don’t want months where doctors won’t talk to you or let you make appointments because there’s no court order yet. The special needs trust does not cover guardianship or medical decision-making. For people who become disabled later in life, having a healthcare power of attorney and HIPAA authorization in place can help avoid guardianship.
00:41:54
Michelle Dexter: We want to look at these issues from all angles because it’s important to protect beneficiaries, keep them out of trouble, and out of court when possible. The best way to make sure your money benefits them and doesn’t just replace government benefits is to include proper special needs language. That just about brings me to the end of my information. I’m happy to answer questions. This is being recorded and will be available on our YouTube channel. If you do ask questions, please keep them general and don’t share personal details.
00:42:59
Michelle Dexter: We appreciate you attending. We’re committed to providing educational content to clients and the community. If you’d like to talk to Francisco, we shared a calendar link in the chat where you can book some time at no charge. One question came in from Jeff: How much should a trust be funded with to start? In Arizona, the process when someone becomes incapacitated or passes away can be more burdensome than in other states. It’s not about a minimum amount in a trust—it’s about whether your loved ones would need access to your money to cover your expenses.
00:44:08
Michelle Dexter: At senior events, parents often ask if their kids need financial powers of attorney. My answer: if your child was in an accident, would you be paying medical bills with their money or yours? For most teenagers, they don’t have much, so it’s not critical. But if your family will need access to your money to cover your expenses, then we need to make sure the right documents are in place. A trust is excellent because it gives banks less discretion. I’ve done another webinar on wills versus trusts that you might find useful, Jeff.
00:45:09
Michelle Dexter: So, there’s no minimum. But if you own real estate, have decent savings, or responsibilities here in Arizona, that’s when you should consider a trust and full estate plan. That means avoiding guardianship, conservatorship, and probate, while making emergencies easier for your family to handle. Great question. Anyone else?
00:46:14
Lisa: I think I just did. Michelle Dexter: Oh, there you are. Yes. Lisa: Okay. I’m going through divorce. We have an adult son who gets SSI. I’m looking for suggestions on how to structure contributions to a trust for his future care. Michelle Dexter: I used to do family law, so I understand. Ideally, you’d create a standalone trust that both of you can contribute to. The challenge may be whether he feels you’re controlling it. Hopefully your divorce is amicable, especially given your son’s needs. You could even say in the trust that if you can’t act as trustee, he can, or both of you could serve as co-trustees if that works.
00:47:29
Michelle Dexter: My suggestion would be a third-party special needs trust that both of you can contribute to. It doesn’t even have to be funded until you’re done using your assets yourselves. It could be written into both of your estate plans that when you pass, your money flows into this trust. That way, it’s one central trust for your son rather than multiple.
00:48:31
Lisa: If we both can add to it, could either of us withdraw from it? Michelle Dexter: That depends on how the trust is set up. If you create it, you’re the grantor—the rulemaker—and you decide who the trustees are. You’d probably be the trustee initially. If he doesn’t have much relationship with your son, you might not name him as trustee. You could instead agree on neutral trustees. And again, he doesn’t have to contribute while alive if he’s not comfortable—he could just direct his estate to fund it later.
Lisa: How much does it cost to set up a third-party special needs trust? Michelle Dexter: Generally around $3,500. It’s specialized and requires detailed planning about expenditures, long-term trustee succession, and ensuring the trust outlives you without requiring court intervention.
00:50:32
Lisa: Okay, thank you so much. Michelle Dexter: You’re welcome. Thanks for joining us. Thank you, Emiline, for the kind words. Any more questions? We finished a bit early, but special needs planning is niche, so we kept it focused. Alexis, do you want to share what’s coming up next?
00:51:37
Alexis Rico Cortes: Thanks, Michelle. Great webinar. On October 15th, Francisco is hosting a webinar on family limited partnerships for rental properties. He’ll cover how to set up a management entity for protection and how to qualify as an active investor to unlock powerful tax deductions. I’ll drop the registration link in the chat. We’ll also send more invites soon.
On October 24th, Francisco is leading a workshop to help attendees make their own will and trust decisions using our client questionnaire. That one won’t be recorded since it’s hands-on. I’ll drop the registration link for that too.
00:52:41
Alexis Rico Cortes: Finally, I also shared Francisco’s calendar link in the chat if you’d like 15–20 minutes with him to discuss today’s or other topics. That’s it from me. Michelle, anything else?
Michelle Dexter: Thanks, Alexis. Yes, the October 24th workshop is great if you haven’t set up your estate plan yet. It helps you make decisions without being overwhelmed. Francisco is excellent at guiding people through this. And at the end of October, I’ll be doing a “Horror Stories in Probate” session—a little Halloween special. It will share real-world examples of when things go wrong, so you can learn what to avoid. Alexis has dropped that link in the chat too.
We appreciate you attending. Education is important to us—whether it’s through my estate planning sessions, Carmy’s financial webinars, or Francisco’s specialized topics. Please reach out with any questions.
