Estate planning is an important part of every family’s financial strategy, but parents with a special needs child have an even greater responsibility than most. It’s imperative to ensure that a child with special needs will be provided for if the unthinkable occurs.
Raising a child with a disability can be very expensive and financial planning must address two considerations: the care costs incurred during the parents’ lifetime, and those that will need to be met once the parents have passed away.
A child with special needs can have a multitude of expenses, determined by their capabilities and health, as well as the family’s lifestyle. Housing for a disabled adult is one of the greatest costs. For example, some adults with cognitive or developmental disabilities may benefit from living in a group home, which can be pricey. Others may need constant care. This is usually provided by parents initially, but after their death, professionals will need to take over. Anyone who lacks capacity to manage their own affairs must have a guardian who can take responsibility for finances, coordinate care, and make medical decisions. The most effective way to protect the best interests of a child with a disability is to create a special needs trust (SNT).
A crucial consideration in establishing a special needs trust is maintaining the beneficiary’s eligibility for government benefits, such as Medicaid and Supplemental Security Income (SSI). Income and asset caps govern access to these programs and poor planning could jeopardize eligibility. Assets contained within a properly structured SNT can be used for expenses other than food and housing. Trust assets can fund enrichment activities, education, travel, entertainment and other activities or purchases that can significantly enhance a child’s quality of life. Funds held within the trust are also shielded from claims by creditors.
The most common type of special needs trust is a third-party trust. The grantor, typically the parents, can fund the trust with their own assets or use life insurance to fund a trust that is structured during their lifetimes. The insurance policy’s death benefit can be paid directly into the trust on a parent’s demise, rather than directly to the child. However, any party other than the trust’s beneficiary can create and fund the vehicle, as well as designate a trustee.
In establishing a third-party special needs trust, many families begin by considering another family member or friend to serve as trustee. They may believe that only a close relation will act in the best interests of the child and operate in accordance with the family’s values. While this is understandable, other factors should be considered. For example, what happens if the family member appointed as trustee dies or becomes incapacitated – who would assume responsibility? Trusteeship comes with responsibilities beyond simply looking after the child’s best interests. There are legal and administrative obligations, such as filing taxes, managing disbursements, paying bills and more. Mistakes by the trustee could threaten eligibility for benefits, or even the trust’s existence.
Professional trustees, fiduciaries and legally obligated to manage the trust in the beneficiary’s best interest, are often better suited to the task. Many banks have trust departments offering professional trustee services and law firms may offer services as well. To ensure that the child’s care is in line with the family’s values, a family member or friend can be appointed as co-trustee.
Another type of special needs trust is the first-party, or self-settled trust. This can be created under particular conditions, for example, in the case of a disabled person who was not a special needs child, but an adult who owned assets prior to becoming disabled, or perhaps a child with a disability who received an inheritance outright. A first-party trust is funded with assets directly owned by the trust beneficiary. When disability is caused by an accident or medical malpractice and the victim receives a court-mandated settlement, the funds are typically paid into a first-party special needs trust that is managed by a court-appointed trustee.
The most important difference between the two trust types is the disposition of assets following the beneficiary’s death. With a third-party special needs trust, the grantor (who established and funded the trust) can direct what will happen to the assets when the beneficiary dies. In the case of first-party, self-settled trusts, any assets remaining must be used to repay the Medicaid benefits the beneficiary used during his or her lifetime.
Most families opt to create a third-party special needs trust, since they can ensure that the assets will continue to support their long-term estate planning goals after the beneficiary’s death. They may wish to keep the assets within the family, use the money to fund charitable goals, or direct it elsewhere. No matter what type of special needs trust is ultimately appropriate for a family’s unique situation, the fact remains that early planning is the best way to ensure future security.For more information, please read: Special Needs Estate Planning | Meier Law Firm