Introduction: Families
with special needs children must exercise extra care in making their
estate plans. This is true whether their special needs child is still a
minor or now an adult, and particularly so when the child is – or in the
foreseeable future will be -- receiving needs-based public benefits such
as SSI or Medicaid. While planning considerations for such a child will
vary depending upon the child’s age, competency, and other family
considerations, the goal is always the same: parents want their estates
utilized to enhance and enrich the life of their special needs child
while maintaining the child’s enrollment in essential public benefits
programs. These goals can be met through the use of a properly prepared
special needs trust.
The essence of all special needs estate
planning is to ensure that the portion of the parents’ estate which
passes to their special needs child at the time of their death is not
considered an “available asset,” as defined by public benefit agencies.
Parents must be mindful of both income and principal, as too much
monthly income, as well as too much “cash,” can negatively impact their
child’s future eligibility for benefits.
Purpose: Special needs planning works to preserve public benefits for the
disabled child while supplementing and enhancing the quality of the
child’s life. This type of planning is useful for many different
purposes, including
- lifetime money management for the benefit of the disabled child;
- protecting the child’s eligibility for public benefits; and
-
- ensuring a pool of funds available for future use in the event public funding should cease or be restricted.
Planning Options: The options available to families in making an estate plan for a special
needs child who is receiving needs-based public benefits include the
following:
- Disinherit the child. This is the simplest option, but it does nothing to accomplish the essential purpose of enriching the life of the special needs child.
- Give the estate to the brothers and
sisters. At the parents’ death the entirety of the estate is distributed
to the child’s siblings, with the understanding that they will “take
care of” their disabled brother or sister. There are inherent risks with
such an approach, including claims by the siblings’ creditors,
bankruptcy, divorce, mismanagement of funds, etc. This may be
appropriate when the child’s potential inheritance is modest.
- Leave an inheritance to the disabled child.
The outcome of this planning option will be the almost certain negative
impact on the child’s continued eligibility for publicly funded
benefits. At the least, benefits may be reduced. In the worst case
scenario, the child may be rendered ineligible for SSI and Medicaid, and
with this ineligibility for assisted housing, supported employment,
vocational rehabilitation, group housing, job coaching, attendant
personal care aides, and transportation assistance. The key benefit is
Medicaid, as this program represents the child’s ability to access not
only essential health care but many other public assistance programs.
- Leave any inheritance in a Special Needs
Trust. This last option will be preferred by most families in their
efforts to provide and ensure a positive outcome for a special needs
child. By using a properly drafted – and properly administered – Special
Needs Trust, the child will continue to qualify for public assistance
programs that would otherwise be unavailable to the child, especially
the “means tested” programs that require the child to meet strict
financial eligibility criteria. A Special Needs Trust works because the
assets held in the trust are not “available” to the child. These types
of trusts must be discretionary spendthrift trusts, with strict limits
on the trustee’s ability to give money to the child. Under no
circumstances can the special needs child force the trustee to make
trust money available to the child. An additional benefit of the Special
Needs Trust is that because the child is often unable to manage his or
her own finances, the parents, in creating the trust, will appoint a
trustee to act as the child’s money manager, and in so doing, ensure
proper financial management after their death.
During Life or at Death? Families
have the option of creating a Special Needs Trust at their death by
incorporating a trust within a Last Will and Testament – this is called
a “testamentary trust.”
The other option is for the parents to create
a Special Needs Trust while alive -- not surprisingly, this is often
referred to as a “living trust” (or inter vivos trust). The advantages
of the living trust include:
- the avoidance of a probate;
- the creation of a trust to which other
family members can make contributions, most usually the grandparents;
and
- an opportunity for a co-trustee to gain
“hands on” experience in administrating the trust.
Revocable or Irrevocable?
Tax considerations come into play in the decision to make the Special
Needs Trust either revocable or irrevocable. Generally speaking, the
family will make the trust revocable whenever:
- the goals include maintaining maximum
control over the trust; and
- the family is not concerned with income tax
considerations.
Correspondingly, the use of an irrevocable
trust may be appropriate when the family is concerned with:
- income tax considerations; and
- if more than a million dollars will be
going into the trust, possible federal estate and gift taxes.
Tax planning is beyond the scope
of this article, so be sure to consult with your attorney, CPA or
financial advisor if there are any special tax considerations in the
creation of your Special Needs Trust.
Selecting Your Trustee:
The Trustee will be responsible for administering your Special Needs
Trust. So selecting your Trustee is one of the most important decisions
your family will make in ensuring the long-term success of your Special
Needs Trust. Given the natural pressures inherent in all families,
someone in your family may consider the funds in the Special Needs Trust
as “their” money, rather than the money of your special needs child.
This can be a dangerous situation, especially as to your child’s
continued eligibility for public benefits. In most families, it is best
to consider selecting an independent, non-family member to serve as your
Special Needs Trustee. The range of options includes:
- a parent, sibling or another “distant”
relative;
- your attorney;
- a Trust company or a financial institution;
- a non-profit organization -- especially one
with experience in special needs; or
- co-Trustees, usually a family member acting
with a trust company.
The selection of any of these potential
Trustees has both advantages and disadvantages. You should closely
counsel with your attorney or financial advisor before making your
Trustee selection.
Conclusion:
This brief summary is just the start of your enquiry as you begin your
special needs estate plan. By working closely with your attorney, your
CPA, and your financial planner, you will develop a much greater
understanding of the options available to you and your family in making
an appropriate estate plan for your special needs child. After making
your wishes known and getting the appropriate documents in place, you
will have taken crucial steps in assuring that this child will receive
proper care when you are no longer able to provide that care yourself.
About the Author:
James M. O’Reilly is a Certified Elder Law Attorney in
Las Vegas, Nevada,
whose practice focuses on special needs planning, elder law and estate
planning. Mr. O’Reilly is a member of the Special Needs Alliance, a
non-profit organization dedicated to serving the legal planning needs of
people with disabilities and their families. Contact information for a
member in your state may be obtained by calling toll-free (877)
572-8472, or by visiting
www.specialneedsalliance.com.