This article examines the unique planning requirements of families with children, grandchildren, or other family members (such as parents) with special needs. There are many misconceptions in this area that result in costly mistakes in planning for the special needs beneficiaries. It is therefore very important to ensure that our clients understand all of their options.
Special needs individuals include those who receive SSI (Supplemental Security Income), Medicaid health insurance, or other needs based programs.
COSTLY MISTAKE NUMBER ONE: Disinheriting the child.
Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. Some people with special needs children may have been advised to disinherit their disabled child – the child who needs their help most – to protect the child’s public benefits. But these benefits rarely provide more than basic needs. And this “solution” does not allow you to help your child or other disabled love one after you becomes incapacitated or pass away. When a child requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others who love the child should consider establishing a Special Needs Trust.
It is unnecessary and in fact poor planning to disinherit a special needs child. People with special needs beneficiaries should consider a Special Needs Trust to protect that beneficiary’s public benefits and care for the special needs beneficiary during your incapacity or after your death.
COSTLY MISTAKE NUMBER TWO: Procrastination
Because none of us knows when we may die or become incapacitated, it is important to plan for a beneficiary with special needs early, just as it is important to plan for other dependents, such as minor children. However, unlike most other beneficiaries, a child or adult with special needs may never be able to compensate for a failure to plan.
A minor beneficiary without special needs can obtain more resources as he or she reaches adulthood and can work to meet essential needs, but a child or adult with special needs may never have that ability.
Parents, Grandparents and other loved ones of a special needs beneficiary face unique planning challenges when it comes to that special needs beneficiary. This is one area where you simply cannot afford to wait to plan.
COSTLY MISTAKE NUMBER THREE: Failure to coordinate a planning team effort
It is critical to include a planning team: an attorney who is experienced in this estate planning area; a life insurance agent who can ensure that there will be enough money to maintain the benefits of a Special Needs Trust for the special needs beneficiary; a CPA who can advise on the Special Needs Trust tax return; an investment advisor who can ensure that the Special Needs Trust fund’s resources will last for the special needs beneficiary’s lifetime; and any other key advisors that may support the goals of the Special Needs Trust going forward.
Special Needs planning dictates that the client’s advisors work together to ensure there are sufficient trust assets to care for the Special Needs Trust beneficiary throughout his or her lifetime.
COSTLY MISTAKE NUMBER FOUR: Ignoring the special needs when planning for the child’s benefit.
Planning that is not designed with the beneficiary’s special needs in mind will probably render the beneficiary ineligible for essential government benefits. A properly designed Special Needs Trust promotes the special needs person’s comfort and happiness without sacrificing the person’s eligibility for needs based programs, such as SSI and Medicaid. Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive electronic equipment and appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality of life enhancingexpenses: the things you now provide to your disabled loved one.
When planning for a person with special needs, it is critical that you use a Special Needs Trust as the vehicle to pass assets for the benefit of that person. Otherwise, those assets may disqualify the disabled person from public benefits and may be available to repay the state for the assistance provided to the person with special needs.
COSTLY MISTAKE NUMBER FIVE: Creating a “generic” Special Needs Trust that does not fit the disabled beneficiary.
Some Special Needs Trusts are drafted as a generic one size fits all, or with unnecessary lack of flexibility. The preparation of Special Needs Trusts requires that the drafting attorney be well informed and up to date regarding the federal and state laws pertinent to Special Needs Trusts so as not to invalidate the disabled beneficiary’s public benefits. Additionally, many Special Needs Trusts are not customized to the particular disabled beneficiary’s needs. Accordingly, the beneficiary fails to receive the benefits that the beneficiary’s family provided when they were alive. Another frequent mistake occurs when the Special Needs Trust includes a “pay-back” provision to Mediciad rather than allowing the remainder of the trust to pass to other beneficiaries upon the death of the special needs beneficiary. While the “pay-back” provisions are necessary in some certain types of Special Needs Trusts, an attorney who knows the difference can save your family a great deal of money.
A Special Needs Trust should be customized to meet the unique circumstances of the disabled beneficiary and should be drafted by a lawyer familiar with this area of the law.
COSTLY MISTAKE NUMBER Six: Failure to Properly “Fund” and Maintain the Plan
When planning for individuals with special needs, it is absolutely critical that there are sufficient assets available for the special needs beneficiary throughout his or her lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes, permanent life insurance is the perfect vehicle to fund a Special Needs Trust.
Also, because this is an ever-changing area of the law, it is important that clients revisit their funding plans frequently to ensure that it continues to meet the needs of the special needs beneficiary.
Clients should consider permanent life insurance as the funding vehicle for special needs beneficiaries, particularly when the special needs beneficiary is young, given the often staggering costs anticipated over that beneficiary’s lifetime. If you may be subject to the estate tax, consider having an Irrevocable Life Insurance Trust own and be the beneficiary of your life insurance policy. The Irrevocable Life Insurance Trust would name the Special Needs Trust as the beneficiary of the life insurance proceeds.
Alternatively, in a no estate tax situation, you may wish to consider naming your revocable living trust as the beneficiary of your life insurance policy, which would then name the Special Needs Trust as the beneficiary of the life insurance proceeds.
COSTLY MISTAKE NUMBER SEVEN: Choosing the Wrong Trustee
During your life, you can manage the Special Needs Trust by naming you as Trustee of the trust. When you are no longer able to serve as the Trustee of the Special Needs Trust, you have made clear in the Special Needs Trust document that you choose successor Trustees who will serve according to the instructions you have provided to them. You may choose a team of advisors, a family member and/or a professional Trustee.
Whoever you do choose as Trustee, it is crucial to keep in mind that the Trustee must be financially savvy, well-organized and, of course, ethical. It is extremely important that the Trustee be very familiar with the laws that pertain to the administration of Special Needs Trusts. If you doubt a family member’s abilities to act as a Trustee, you should consider using a professional Trustee. If you are concerned that a corporate Trustee might be too impersonal, you can always name a friend or family member to be a Co-Trustee.
COSTLY MISTAKE NUMBER EIGHT: Failing to Invite Contributions from Others to the Special Needs Trust
A key benefit of creating a Special Needs Trust now is that the beneficiary’s extended family and friends can make gifts to the Special Needs Trust or remember the Special Needs Trust as they do their own estate planning. For example, the family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their revocable living trust or Will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits. (As to military survivor benefit plans, see below.)
Creating a Special Needs Trust now allows others, such as grandparents and other family members, to name the Special Needs Trust as the beneficiary, or one of the beneficiaries, of their own estate planning.
COSTLY MISTAKE NUMBER NINE: Relying on Siblings to Use Their Inherited Money for Your Special Needs child.
You may be considering relying on your other children to provide for your special needs child from their own inheritances. This 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, it is not a solution that will protect your special needs child after you have passed away or when your other children have their own expenses and financial priorities.
What if the inheriting sibling divorced, lost a lawsuit or incurred unanticipated bills? The inheriting sibling’s spouse or creditor may be entitled to a large portion of that sibling’s assets and the money is no longer available to take care of the special needs child. What if the inheriting sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for your child with special needs as thoughtfully and completely as your child’s siblings did?
Siblings of a special needs child often feel a great responsibility for that child and have felt so all of their lives. If you create a Special Needs Trust, it lessens the burden on all of your children and supports a loving and involved relationship among them.