Third-Party SNT Drafting for Equal Treatment of Siblings
Priya and Anand have $800,000 in savings, a $500,000 home, and two children: Maya, 22, a college senior, and Rohan, 19, who has autism and receives $943 monthly SSI and Medicaid waiver services. Their current wills leave everything equally to the children outright. They want to treat the children equally, name Maya as trustee for Rohan's share, and buy a $500,000 life insurance policy on Anand. Maya is reliable but has student loans and wants to use some trust money to help Rohan travel and to pay her own expenses when she visits. Anand wants the trust to pay Rohan's rent and utilities directly. Priya worries that Rohan will be disqualified from SSI if he receives an equal share. The policy is currently owned by Anand.
1. Compare an outright equal bequest to Rohan with a third-party special needs trust. What should the parents do to treat the children equally without jeopardizing Rohan's benefits?
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An outright equal bequest would give Rohan more than $2,000 and terminate SSI; it could also jeopardize Medicaid waiver services tied to SSI. A third-party special needs trust funded with the parents' assets is not a countable resource for SSI or Medicaid, does not require a Medicaid payback, and can supplement Rohan's needs for his lifetime.
Equal treatment does not require identical legal forms. The parents can leave Maya her share outright and Rohan's share in the SNT, with remainder to Maya or the grandchildren. To equalize value, they can fund the SNT with life insurance rather than reduce Maya's inheritance. The SNT should be the beneficiary of the $500,000 policy, not Rohan individually. A formula clause can allocate the estate so the SNT is funded without disinheriting Maya. The parents should update beneficiary designations, not just wills.
2. Draft the distribution standard and trustee selection provisions. How should the trust address Maya's request to use trust funds for travel and her own expenses?
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The trust should be discretionary and supplemental: the trustee may pay for Rohan's special needs, education, travel, recreation, medical care, and other quality-of-life expenses, but should not be required to replace SSI or Medicaid. Payments for rent and utilities can be made, but they may count as in-kind support and maintenance and reduce SSI; the trustee should coordinate with benefits counsel.
Maya cannot use trust funds for her own expenses, even when visiting Rohan; that would be a breach of the sole-benefit rule and could be self-dealing. If Maya travels with Rohan, only Rohan's share of costs is permissible. Maya may serve as trustee, but a co-trustee or professional trustee should handle distributions to her or any conflict. Include a trust protector, accounting, and resignation provisions.
3. What tax and remainder issues arise from naming Maya as trustee and remainder beneficiary? How should the trust be structured to avoid inclusion in Rohan's estate or Medicaid payback?
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A third-party SNT is not subject to Medicaid payback, so the remainder may pass to Maya, Rohan's descendants, or charity. Rohan should not have a general power of appointment; otherwise the trust could be included in his estate and become available to creditors. Maya, as trustee and remainder beneficiary, has a conflict; she should not participate in decisions that accelerate her remainder.
The trust is a separate income-tax taxpayer with compressed brackets; distributions carry out distributable net income. If life insurance funds the trust, an irrevocable life insurance trust can keep proceeds out of the parents' estates, but the SNT must be the beneficiary and the policy ownership and transfer rules must be followed. The parents should sign a letter of intent describing Rohan's providers, routines, and wishes.