As the seasons change, many of us return to more ordinary work schedules and family routines. Before the bustle of the holidays sets in and another tax season rolls around, now would be an excellent time to review your current estate plan, to ensure the arrangements reflect your current wishes. Perhaps updating your will or trust was a New Year’s resolutions for 2009. If so, do not let another year slip by.
In the spirit of David Letterman’s top ten lists, please consider the following top ten ideas when planning for a loved one with special needs (with a few bonus items tossed in at the end). While certain tips may be familiar to those who already have incorporated special needs planning into their estates, we hope this article sparks some new thoughts for your family’s evolving needs.
1. Don’t disinherit the family member with special needs. An archaic approach of giving the greater share of one’s estate to a so-called “healthy” child and intentionally disinheriting a child with disabilities is entirely unnecessary and even unintentionally cruel. Instead, consider allocating some funds to a purely discretionary special needs trust for a child with special needs in order to benefit this child without interfering with public benefits.
2. Carefully consider the division of assets among your children. Take the time to realistically consider the potential needs of your descendants. Nothing requires you to treat each person equally. In fact, it is common for parents to set aside all or the majority of their estates for one child who needs more assistance, especially when their other children are leading self-sufficient, productive lives.
3. Discuss allocation of expenses and taxes in your estate. It is important to consider how expenses and taxes are apportioned among the recipients of an estate. Whether you create a special needs trust during your lifetime or upon your death, you should specify whether estate taxes attributable to the inclusion of the trust in your estate should be charged against that trust, or entirely allocated to the remaining shares. Requiring a special needs trust to pay a portion of the estate taxes will reduce funds set aside for the child with disabilities.
4. Choose the trustees of a special needs trust carefully. You have heard it before, and no doubt will hear it again, but utmost care is needed when choosing the trustee of a special needs trust. The trustee typically will be given “sole and absolute” discretion, a standard that often is required when determining a beneficiary’s eligibility for benefits such as Supplemental Security Income (SSI) or Medicaid. While a natural choice may be the appointment of an adult sibling as successor trustee, an inherent conflict may exist if the sibling (or his children) is a future trust beneficiary. However, a prime advantage in choosing a family member as trustee is that person’s familiarity with the beneficiary. Here are some other options:
- Consider naming a professional, such as an attorney or a bank, as trustee or co-trustee.
- Give the trustee authority to delegate tasks to a professional, thereby allowing the family-member trustee to serve but benefit from additional expertise.
- Name a family member, but designate a trust advisor to assist with investment decisions.
- Appoint a trust protector who may remove the trustee if necessary. This would permit replacement of a corporate trustee or removal of a family member who may be acting out of self-interest.
5. Prepare a letter of intent. A detailed letter of intent is your opportunity to step away from the legalese of your will or trust and to be more personal. This letter is especially important for a new caregiver or non-parent trustee, as it provides information concerning the day-to-day activities, unique likes, dislikes, needs, preferences, and other critical information concerning the child with special needs.
6. What if you become incapacitated? It is essential that you consider planning for your child’s special needs if you become incapacitated in the future. You may wish to include a provision in your financial power of attorney allowing your agent to make discretionary, non-support distributions for the benefit of your special needs child, and allows the agent to establish and fund a trust for such child. Second, consider authorizing your agent to create a “sole benefit trust” for a child with disabilities if you were to require nursing home care. Transfers to this type of trust can assist in qualifying a parent for Medicaid eligibility, while still preserving assets for the child.
7. Review the titling and beneficiary designations on all of your assets. It is essential that you ensure no assets inadvertently pass directly to a child with special needs, potentially resulting in disqualification from benefits.
8. Consider using life insurance to fund a special needs trust. Second-to-die policies that pay after both parents’ deaths are a useful tool especially when a properly established special needs trust is a named beneficiary. A knowledgeable financial advisor or insurance agent may assist you in determining whether life insurance is appropriate and which policy is best for you.
9. Retirement plans and IRAs are generally not the most effective method of funding a special needs trust. Typically such plans have minimum required distributions which may negatively impact means-tested public benefits. Nevertheless, if retirement benefits are to be paid to a special needs trust, be aware that it likely will trigger the entire income tax liability up front, thereby reducing the net amount available for the child.
10. Don’t forget to coordinate other relatives’ estate planning with your own. Family members may wish to name your child as a beneficiary of their estates. In order to preserve means-tested benefits, it is critical that potential inheritances be directed to a special needs trust for the child with disabilities. Fortunately, anyone (other than the special needs child) can create a “third party” special needs trust during his or her lifetime for the child’s benefit. Once created, the trust may receive gifts, bequests, and inheritances from relatives or friends who choose to name it as a beneficiary. It also is an efficient and cost-effective way to avoid other family members having to prepare separate special needs trusts for the child.
11. Remember that your special needs child may need his or her own estate plan. Depending on your child’s capacity, certain basic documents are advisable, including a general power of attorney, a health care directive, and a HIPAA release for the child. You should also consider a simple will, depending on the child’s capacity. Finally, consider setting up a self-settled special needs trust for the child’s own assets where means-tested benefits are needed. Such a trust must generally be established by a parent, grandparent, guardian, or through the court, so it is important to consider whether a need for such a trust may arise in the future.
About this Newsletter: We hope you find this newsletter useful and informative, but it is not the same as legal counsel. A free newsletter is ultimately worth everything it costs you; you rely on it at your own risk. Good legal advice includes a review of all of the facts of your situation, including many that may at first blush seem to you not to matter. The plan it generates is sensitive to your goals and wishes while taking into account a whole panoply of laws, rules and practices, many not published. That is what The Special Needs Alliance is all about. Contact information for a member in your state may be obtained by calling toll-free (877) 572-8472, or by visiting the Special Needs Alliance online.