Planning for Special Needs

Estate planning by parents who have children with special needs include many 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 that your other children are not over-burdened with caring for the sibling with special needs? 
• What is fair in terms of distributing your estate between your children with special needs and your other children?
• How do you make sure that there is enough money to sustain your special needs child over time? 

Special Needs Trust

Often, parents of children with special needs try to resolve these issues by leaving their estates to their other children and disinheriting the disabled child. They have a number of reasons for this approach: The special needs child shouldn’t receive anything, because he/she cannot manage money and would lose his/her benefits. He/She doesn’t need any inheritance, because he/she will be taken care of by the public benefits he/she receives. The other children will take care of their sibling with special needs.

This approach is unsound 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 is 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 sibling places and undue burden on them and strains relations between them. It makes it unclear whether inherited money belongs to the child to spend on what they please, or whether he/she must set it aside for his/her sibling with special needs. If one child sets money aside, and the other doesn’t, resentments can build that may split the family forever.

The better answer for many of these questions is the Supplemental Needs Trust, also often called a “Third Party Special Needs Trust.” Such trusts fulfill two primary functions: The first, to manage funds for someone who many not be able to do so themselves due to disability. The second, to preserve the beneficiary’s eligibility for public benefits, whether that be SSI, Medicaid, public housing or any other program.

How Trusts Work

A trust is a form of the ownership of property, whether real estate or investments, where one person -the trustee- manages the 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.

In general, trusts fall into two main categories: self-settled trusts sometimes referred to as a “First Party Special Needs Trust” that the beneficiary created for himself with his own money, and third party trusts that one person creates and funds for the benefit of someone else. A self-settled trust for an individual, who is disabled, coming into an inheritance or proceeds from a personal injury or medical malpractice claim; a third-party trust  for a parent planning for a special needs child, or one  spouse planning for a spouse with a disability. 

Each situation and each benefit program has its own rules that affect the drafting, funding and administration of special needs trusts. Generally, you cannot create a trust for your own benefit and have the funds unaccountable for purposes of Medicaid and SSI and other public benefits programs. However, Medicaid and SSI have provided for “safe harbors” that permit the creation of a self-settled special needs trust in certain circumstances.

Accessing and Preserving Public Benefits

In general, if one person creates a trust for the benefit of someone else, and the trustee has complete discretion about whether and when to make distributions to the beneficiary, the trust funds will not be considered as available when considering the trust beneficiary’s eligibility for public benefits. Unfortunately, matters get more complicated when the trust income and assets are actually used for the beneficiary. For instance, trusts funds distributed directly to the beneficiary will reduce their SSI dollar for dollar. Trust funds used on food and shelter will also cause a reduction in SSI benefits. In other words, while the existence of a properly-drafted trust will not affect eligibility for benefits, the use of the trust funds could if care is not taken.

As a result, some supplemental needs trusts are written to restrict the trustee’s discretion to make payments so that those payments from the trust will not affect eligibility for public benefits are permitted. Other trusts are written to give the trustee complete discretion, but the trustee receives guidance in the trust document on how to make distributions to minimize their impact on eligibility for benefits. Since the future cannot be predicted with any certainty, flexibility permits the trustee to adjust to whatever may happen.

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 supplemental needs trust must be able to fulfill all the normal functions of a trustee – accounting, investments, tax returns, and distributions – and also be able to meet the needs of the special needs beneficiary. The latter includes an understanding of various public benefits programs, sensitivity to the needs of the beneficiary, and the knowledge of services that may be available.

There are a number of possible solutions available. Often parents choose to appoint co-trustees – a bank or law firm as a professional trustee, along with a family member. Working together, they can provide the necessary resources and experience to meet the needs of the child with special needs. Unfortunately, in many cases such a combination is not available. Professional trustees may not be available if the trust assets are below a certain level. There may not be an appropriate family member to act as a co-trustee.

Where the size of the trust is insufficient to justify hiring a professional trustee, two solutions are possible. The first is to have a family member trustee who would hire attorneys, accountants and investment advisors to help with administrating the trust. The second is to use a pooled trust. Medicaid and SSI laws permit “(d)(4)(C)” trusts or “pooled trusts” for beneficiaries with special needs. Such trusts pool the resources of many beneficiaries, and those resources are managed by a non-profit organization.

To find a listing of pooled trusts in your state, refer to the Special Needs Answer Web Site: www.specialneedsanswers.com  where you will find a listing of pooled trusts around the country.

Where no appropriate family member is available to serve as a co-trustee, the parent may appoint a professional trustee and direct the professional trustee to consult with named individuals who know and care for the child with special needs. These could be family members who are not appropriate trustees, but can serve in an advisory role. Or they may be social workers or others who have both professional knowledge of the beneficiary and the resources available for their care. This role may be formalized in the trust document as a “Care Committee.” Again, where no such individuals exist, the pooled trust described above provides a solution. Both trusts have professionals on staff who can provide care components of a special needs trust.

Funding the Trust

A number of issues arise with respect to the question of how much money to put into a 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 your children, no matter their need?
• Third, how will you assure that there is enough money?

The first question is a difficult one. The answer depends on the 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. But in all cases it’s better to err on the side of more money rather than less. You can’t be certain current public benefits programs will continue. And you have to factor in paying for services, such as case management if you are not available.

If these assumptions mean that your child with special needs will require a large percentage of you estate, how will you provide for your other children, as you desire?

One solution to the challenge of assuring that there is enough funds is life insurance. You could divide your estate equally among your children, but use life insurance to supplement the amount going to the supplemental needs trust for your child with special needs. The younger you are when you start, the more affordable the premiums will be. And if you are married, the premiums can often be lower if you purchase a policy that pays out only when the second parent dies. 

Safe Harbor Trust

So far, we’ve primarily been discussing estate planning by parents and the money they plan to leave for their child with special needs. A supplemental needs trust can also serve to hold any inheritance that may come from a grandparent or other family member. However, it should never hold funds belonging to a disabled individual. As a general rule, the funds held by such a self-settled trust would be considered available to the disabled beneficiary and render him ineligible for Medicaid or SSI benefits.

Fortunately, both Medicaid and SII share two “Safe Harbor” trusts that permit a beneficiary to shelter his own funds, qualify for public benefits, and remain a continuing beneficiary of the trusts. These trusts fall in two categories: single-beneficiary and pooled trusts. The single-beneficiary trust are generally referred as “(d)(4)(A)” trusts, referring to the enabling statute, or “pay-back” trusts, referring to their primary feature that any fund remaining in the trust upon the beneficiary’s death be used to reimburse the state for any Medicaid expenditures it made on the beneficiary’s behalf. Only funds that remain after such reimbursement may pass on to the beneficiary’s family.

The pooled trusts are generally referred to as “(d)(4)(C)” trusts, again referring to  the enabling statute, or “pooled disability” trusts. Like the third-party pooled trusts described, these are established by non-profit organizations. Each of these safe-harbor trusts has its own rules, which must be strictly followed to qualify for Medicaid and SSI exceptions.

“Payback Trusts”—also referred to as a “Self-Settled Special Needs Trust”—must be created while the special needs individual is under the age of 65 and they must be established by their parents, grandparents or legal guardian or by a court. They must provide or the sole benefit of the beneficiary and at the beneficiary’s death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary’s behalf.

“Pooled Disability Trusts”—also referred to as a “Pooled Trust”—must be managed by a non-profit association. Unlike Payback Trusts, upon the beneficiary’s death the state does not have to be repaid for its Medicaid expenses on the beneficiary’s behalf as long as the funds are retained in the trust for the benefit if other special needs beneficiaries. (At least, that’s what the federal law states, some state, are known to require reimbursement under all circumstances.)

Special Needs Planning

The best interest of all family members is served when you secure the counsel of an experience attorney who practices Special Needs Planning. Take comfort in knowing that you have performed a thorough investigation and planted measure to preserve your family assets and expected benefits in order to provide your child with the best future that you are able. 

It’s Up to You

Planning today and for the future can ensure that the highest quality of life for your child with special needs. Trusts can help families manage funds while also preserving a child’s eligibility for public benefits. An experienced Special Needs Planner can help you devise the best solution for your child. 

9 Costly Mistakes to Avoid When Planning

for a Child with Special Needs      

Costly Mistake # 1: Disinheriting the Child.

Many families who have children with special needs rely on SSI, Medicaid or other government benefits to provide food, clothing and shelter. You may have been advised to disinherit your special needs child – the child that needs your help the most! – to protect that child’s public benefits. But these benefits rarely provide more than subsistence. And this “solution” does not allow you to help your child after you are incapacitated or gone. If your child requires governmental assistance to meet his/her basic needs, you should consider establishing a Special Needs Trust.

Costly Mistake # 2- Ignoring Special Needs When Creating a Trust for a Child.

A trust that is not designed with you child’s special needs in mind will probably render your child ineligible for essential benefits. The Special Needs Trust is designed to promote your child’s comfort and happiness without sacrificing ineligibility.

Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (such as specially equipped vans), training and education, insurance, transportation and essential dietary needs. If the fund is sufficiently funded, your child can also receive electronic equipment and appliances, computers, vacations, movies, payments for a companion, clothing and other self-esteem enhancing and quality-of-life expenses: sorts of things that you now provide. 

Costly Mistake # 3- Creating a “Generic” Special Needs Trust that Does Not Fit.

Even some Special Needs Trusts are unnecessarily inflexible and generic. Many trusts are not customized to the particular child’s needs even though the trust does not disturb governmental benefits. Thus the child fails to receive the benefits that the parents provided when they were alive.

Another mistake I see when lawyers put a government “pay-back” provision into the trust  rather than allowing the remainder of the trust to go to other family members upon death of the child with special needs. These government “pay-back” provisions are necessary in certain types of special needs trust. An attorney who knows the difference can save your family hundreds of thousands of dollars or more.  Over time, their child’s evolving needs can dictate the trust provisions and, just as important, changes in the law can be reflected in the trust. If there’s one thing that can be said for sure is about the law in this area, is that the law will be different in the future.

Costly Mistake # 4- Procrastinating.

Because none of us knows if when we will die or if we will become incapacitated it’s important to plan  for you child with special needs early, just as you would for other dependents such as minor children. Unlike most other beneficiaries, your child with special needs may never be able to compensate for your failure to plan. A minor beneficiary without special needs will have the ability to obtain more resources when he or she enters the workforce. A child with special needs may not have that opportunity. 

Costly Mistake #5- Falling to Invite Contributions From Other Wills and Trusts.

A key benefit of creating a special needs trust is that your extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. You can also consider whether making the trust the beneficiary of a life insurance policy makes sense now, while you are healthy and insurance rates are low.

In addition to the gifts and inheritances from other people who love your child, you can leave your own assets to the trust in your will. You can also name the trust as a beneficiary of life insurance or retirement benefits.

Costly Mistake # 6- Choosing the Wrong Trustee.

During your life, you can manage the Special Needs Trust. When you or your spouse are no longer able to serve as trustee, you can choose who will serve according to the instructions that you have provided in the trust. You may choose a team of advisors. You may choose a professional successor trustee. Make sure that whom ever you choose is financially astute, well organized, and most important, ethical and caring.

Costly Mistake # 7- Relying on Your other Children to Use Their Money for Your Child with Special Needs.

You can rely on you other children to provide for your child with special needs from their own monies or from an inheritance. That can be a temporary solution for a brief time, such as during a brief incapacity, if your other children are financially secure and have money to spare.

However, relying on siblings is not a long-term solution that will protect your special needs child after you and your spouse have died. Even well-intentioned siblings have their own lives and financial concerns from the many potential problems they face.

What if your child with the money divorces? His or her spouse may be entitled to half of it and may not take care of you child with special needs. What if the child with the money dies or become incapacitated while your child with special need is still living?  Will his or her heirs then care for your child with special needs as thoughtfully and as completely as your child with the money did?

What if your child with the money losses a lawsuit and has to pay a large judgment or has other significant creditors problems? The court will certainly require your child to turn that money over to the creditor. If you create a Special Needs Trust, you protect all your children. The trust facilitates easier record keeping and allows your other children to rely on the assistance of a professional trustee, if needed.

Siblings of a child with special needs often feel a great responsibility for their sibling and have felt so all of their lives. When you provide clear instructions and helpful structure, you lessen the burden on all your children and you support a loving and involved relationship among them.

Costly Mistake # 8- Failing to Protect the Child with Special Needs from Predators.

An inheritance from parents funded into the child’s Special Needs Trusts stated in the parent’s last will and testament is a matter of public record once the will is filed for probate. Whereas revocable living trust is not in the public record. Predators are particularly attracted vulnerable beneficiaries, such as the young and those with limited self-protective capacities. With a trust, you limit the access to the information about you children’s inheritance. This protects your child and other family members, who may be serving as trustee, from predators.

Costly Mistake # 9- Failure to Properly “Fund” and Maintain the Plan.

Every trust-based estate plan requires changes to asset ownership and beneficiary designations. If the plan includes life insurance protection (done with an “Irrevocable Life Insurance Trust”), these asset transfers can become complicated.

Your attorney should direct which asset goes where, and why. If you suspect the assets were not properly transferred or if you are unsure to what you need to do, take action! Call your attorney and request a report. Improper funds maintenance is one of the most common reasons that estate plans fail.