Estate Planning For Parents of Special Needs Children

A recent Wall Street Journal article focused on estate planning for parents of children with special needs, which 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 that your other children are not over-burdened with caring for the disabled sibling?
What is fair in terms of dividing your estate among your disabled child and your other children?
How do you make sure there’s enough money to meet your disabled child’s needs?

Often, parents of children with special needs try to resolve these issues by leaving their estates to their healthy children — disinheriting the disabled children. These parents offer a variety of justifications for this approach:

– The disabled child shouldn’t receive anything because she can’t manage money and would lose her benefits.
She doesn’t need any inheritance because she will be taken care of by the public benefits she receives.
The other children will take care of their 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 healthy child to spend as he pleases, or whether he must set it aside for his disabled sister. If one child sets money aside, and the other doesn’t, resentments can build that may split the family forever.

The better answer to many of these questions is a special type of trust called a “Supplemental Needs Trust” or 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 be Medicaid, 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 winning or settling a personal injury claim, or one spouse planning for a disabled spouse. 

First, a short explanation of what trusts are and how they work: A trust is a form of ownership of property, whether real estate or investments, 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. In the special needs context, trusts fall generally into two main categories: self-settled trusts that the beneficiary creates for himself with his own money and third-party trusts that one person creates and funds for the benefit of someone else. 

Each situation and each benefit program has its own rules which affect the drafting, funding and administration of special needs trusts. The public benefit programs in many ways track the treatment of trusts in terms of creditor protection. Just as in most states you cannot create a trust for your own benefit and protect the trust funds from creditors, you generally cannot create a trust for your own benefit and have the funds uncountable for purposes of Medicaid, SSI and other public benefits programs. However, Medicaid and SSI have provided for “safe harbors” that permit the creation of self-settled special needs trusts in certain circumstances. 

Preserving Public Benefits  

In general, if one person creates a trust for the benefit of someone else, and the trust is drafted to give the trustee complete discretion 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 assets are actually used for the beneficiary. For instance, trust funds distributed to a beneficiary will reduce that beneficiary’s SSI dollar for dollar. In many circumstances, trust funds used on the beneficiary’s behalf 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 extreme care is not taken. 

The Farr Law Firm can help parents decide what type of Special Needs Trust best fits their child’s particular situation. Parents need to consider the structure of the trust with their child’s basic needs in mind.  Factors to consider include the nature of the child’s special needs, the source and type of the child’s assets and whether the child is going to have access to the trust throughout his or her lifetime.

For additional information about Special Needs Trusts, please see www.VirginiaSpecialNeeds.com and click on the link for Special Needs Trusts.

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.

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