By T. Edmund Spinks, Esq.
October is a perfect time for everyone to review their family’s will, trust and other estate planning documents. While each family’s situation is different, estate planning by parents who have children with disabilities includes the following challenges:
• How do you leave funds for the benefit of the child without causing the child to lose important public benefits?
• How do you make sure that the funds are well managed?
• How do you make sure there is enough money to meet your child’s special needs?
Often, parents of children with special needs try to resolve these issues by leaving their entire estate to their other children, leaving nothing to the children with disabilities. They have a number of reasons for this approach: The child with disabilities should not receive anything because they can’t manage money and would lose their benefits. The child with a disability does not need any inheritance because they will be taken care of by public benefits, or their brother/sister.
This approach is to be discouraged for a number of reasons. First, public benefits programs are often inadequate – they need to be supplemented with other resources. Second, both public benefits programs and individual circumstances change over time. What’s working today, may not work tomorrow. Other resources need to be available, just in case. Third, relying on one’s other children to take care of their siblings places an undue burden on them and can strain relations between them. It makes it unclear whether inherited money belongs to the non-disabled child (and their spouse) to spend as they please, or whether it must be set it aside for their disabled sibling.
The better answer to many of these questions is the Supplemental Needs Trust, also often called a “Special Needs Trust.” Such trusts fulfill two primary functions: The first is to manage funds for someone who may not be able to do so himself or herself due to disability. The second is to preserve the beneficiary’s eligibility for public benefits, whether that is health care, Supplemental Security Income, public housing, or any other program. They come into play in a multitude of situations, including parents planning for a disabled child, a disabled individual coming into an inheritance, or one spouse planning for the other spouse’s disability.
First, a short explanation of what all trusts are and how they work: A trust is a form of ownership of property, real estate, investments, money, etc., where one person—the trustee—manages such property for the benefit of someone else—the beneficiary. The trustee must follow the instructions laid out in the trust agreement as to how to spend the trust funds on the beneficiary’s behalf—whether and when to distribute the trust income and principal.
A special needs trust is distinguished from other trusts because it is tailored to a person with a disability and is designed in accordance with state and federal law to manage assets for that person’s benefit while not compromising access to important government benefits. Special needs trusts fall into two main categories: self-settled trusts that the beneficiary creates for themselves with their own money and third-party trusts that one person creates and funds for the benefit of someone else.
Choice of Trustee
Choosing a trustee is one of the most difficult parts of planning for a child with special needs. The trustee of a special needs trust must be able to fulfill all of the normal functions of a trustee—accounting, investments, tax returns, and distributions—and also be able to meet the needs of the special beneficiary. The latter can include an understanding of various public benefits programs, sensitivity to the needs of the beneficiary, and knowledge of services that may be available.
There are a number of possible solutions available. Often parents choose to appoint co-trustees—a bank, law firm or CPA as a professional trustee along with another child as a family trustee. Working together, they can provide the necessary resources and experience to meet the needs of the child with special needs.
Where the size of the trust is insufficient to justify hiring a professional trustee, two solutions are possible. The first is simply to have a family member trustee who would hire accountants, attorneys, and investment advisors to help with administering the trust. The second is to use a pooled trust; a pooled trust is generally referred to as a “(d)(4)(C)” trusts, referring to the enabling statute, or “pooled disability” trusts and are operated by non-profit organizations.
Funding the Trust
A number of issues arise with respect to the question of how much to put into the trust. First, how much will your child with special needs require over her life? Second, should you leave the same portion of your estate to all of your children, no matter their need? Third, how will you assure that there is enough money?
The first question is a difficult one. It depends on what assumptions you make about your child’s needs and the availability of other resources to fulfill those needs. A financial planner with experience in this area can help make projections to assist with this determination. However, it is better to err on the side of more money rather than less. You cannot be certain current programs will continue. In addition, you have to factor in paying for services, such as case management, that you provide free-of-charge today.
One solution to the question of fairness and to the challenge of assuring that there are enough funds is life insurance. You could divide your estate equally among your children, but supplement the amount going to the supplemental needs trust for your child with special needs with life insurance. The younger you are when you start, the more affordable the premiums will be. In addition, if you are married, the premiums can often be lower if you purchase a policy that pays out only when the second of you dies.
The above discussion primarily involves estate planning by parents for money they plan to leave for their children with special needs. A special needs trust can also serve to hold any inheritance that may come from a grandparent or other family member. Overall, each family will have to consider the above factors as well as the needs, and desires of the family as a whole. It is promising there are options to protect the needs of people with disabilities later in life, if time is taken early to develop an appropriate long term estate plan.
SPINKS LAW FIRM