Planning for Your Child with Special Needs
While all parents must plan to make sure that their minor children will be taken care of in the event of the parents’ death or disability, for parents of children with special needs, these concerns never end. Depending on the level of disability, their children will depend on their parents for financial and emotional support and guidance for the parents’ lifetimes and beyond.
More families are dealing with these issues than ever before due to advances in medical care: more people with congenital disabilities or injuries are living longer; premature babies are surviving with ailments; victims of accidents of all sorts are surviving. At the same time, as health care becomes more complex and more high-tech, it has also become more expensive. The maintenance of eligibility for Medicaid to cover health care costs can be vital, as does coverage by other public programs such as Supplemental Security Income (SSI) and subsidized housing.
Financial planning, therefore, needs to cover not only the parents’ retirement and long-term care needs, but ongoing support for any children with special needs. (Presumably, other children will be able to fend for themselves.) The challenges include:
- Making sure the funds you leave your child with a disability benefit her without causing her to lose important public benefits.
- Making sure funds are well-managed.
- Assuring that your other children are not over-burdened with caring for their disabled sibling, and that any burdens fall relatively evenly among the siblings.
- Trying to be fair in terms of distributing your estate between your disabled child and your other children.
- Making sure there’s enough money to meet your disabled child’s needs as well as figuring out what is enough.
Parents of children with special needs may try to resolve these issues by leaving their estates to their other children, and nothing to the disabled children. They have a number of reasons for this solution: 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 sibling.
This approach is to be discouraged for a number of reasons. First, public benefits programs are usually 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 sibling could place an undue burden on them and 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 sibling. If one child sets money aside, and the others don’t, resentments can build that may split the family forever.
So, use a trust. This is what they’re for.
Special Needs Trusts
So-called “special”, or sometimes “supplemental”, needs trusts fulfill two primary functions: First, they provide a structure for managing funds for someone who may not be able to do so himself or herself due to disability. Second, they preserve the beneficiary’s eligibility for public benefits, whether that be Medicaid, SSI, subsidized housing, or any other program. They come into play in a multitude of situations, including parents or grandparents 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.
In essence, a special needs trust is a discretionary trust, permitting the trustee to use the trust funds as it deems appropriate for the beneficiary. The beneficiary has no right to demand payment of trust funds or to depend on it for support. It’s this wording that assures that the trust funds will not be counted in determining the beneficiary’s eligibility for public benefits, or for that matter, being subject to claims by creditors of the beneficiary, or an ex-spouse in the event of a divorce. Depending on the source of the funds and whether the parents have particular tax or other planning goals, the exact terms of the trust will be tailored to meet those objectives.
All of this discussion assumes that the money, investments, or real estate funding the trust are coming from the parents or grandparents. These are sometimes called “third-party” trusts because the donor and the beneficiary are not the same person. The rules of public benefits programs are much more strict if the applicant for coverage has a trust funded with his own money, sometimes referred to as “first-party” trusts.
Choice of Trustee
Often, choosing a trustee is the most difficult part of planning for a child with special needs. Since the individual with special needs will likely need the trust to last for her lifetime and will have no claim to the funds except as decided upon by the trustees, the selection of trustees is especially important.
The trustee of a supplemental needs trust must be able to fulfill all of the normal functions of a trustee — accounting, investments, tax returns and distributions — and also meet the needs of the special beneficiary. The latter can include an understanding of various public benefits programs, sensitivity to the beneficiary’s particular style of communication, and knowledge of services that may be available. Often family members have the necessary emotional attachment, but don’t have the experience, expertise, or available time to handle the financial and legal aspects of serving as trustee. Professionals, such as lawyers and bank trustees, have the financial and legal experience necessary, but may not know the beneficiary well or be equipped to respond to the needs a beneficiary who may be more demanding than their typical client.
Qualities of good trustees for a special needs trust include:
- ability to make sound financial decisions and to invest and properly report trust transactions;
- an understanding of the rules around eligibility for public benefits, or a willingness to learn;
- availability and the time to spend to perform the duties needed;
- honesty and integrity; and
- emotional attachment to the individual.
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 another child as a family trustee. 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 generally require a minimum amount of funds in the trust, usually at least $500,000. Otherwise their fees become unreasonable in relation to the size of the trust. In other situations, there is no appropriate family member to appoint as co-trustee.
When the size of the trust is insufficient to justify hiring a professional trustee, two solutions are possible. The first is simply to have a family member trustee who would hire accountants, attorneys and investment advisors as needed to help with administering the trust. The second is to use a pooled trust managed by a non-profit organization. These trusts generally provide the added benefit of the advocacy group providing information about the programs and benefits available in the community. (Here is a nationwide directory of pooled trusts.)
When no appropriate family member is available to serve as co-trustee, the parent may 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 who can serve in an advisory role. Or they may be social workers or others who have both personal and professional knowledge of the beneficiary and the resources available for her care. This role may be formalized in the trust document as a “Care Committee.”
Often special needs trusts appoint one or more trust protectors who have the power to hire and fire trustees, appoint a successor trustee if the current trustee resigns or becomes incapacitated, review trust accounts, and make limited amendments to the trust. This can be a good role for family members or friends who you trust, but who don’t have the time available, live too far away, or are otherwise inappropriate to serve as trustee.
Funding the Trust
A number of issues arise with respect to the question of how much to put into the trust. First, how much will the child with special needs require over her life? Second, should parents leave the same portion of your estate to all of their children, no matter their need? Third, how will they assure that there’s enough money to meet everyone’s needs?
The first question is a difficult one. It depends on what assumptions are made about the child’s needs and the availability of other resources to fulfill those needs. Financial planners who work in this field 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 programs will continue. And you have to factor in paying for services, such as case management, that the parents provide free-of-charge every day.
If these assumptions mean that the child with special needs will require a large percentage of his parents’ estate, how will his siblings feel if they receive less than their pro rata share? After all, the estate may already be smaller than it would be otherwise due to the time and money spent providing for the child with special needs. And the other children may feel they have received less of parental attention growing up than they would have otherwise had they not had a sibling with special needs.
One solution to the question of fairness and to the challenge of assuring that there are enough funds is life insurance. Parents can divide their estate equally among their children, but supplement the amount going to the special needs trust with life insurance. Unlike life insurance purchased to take care of minor children, which may be term insurance, insurance to fund a special needs trust should be permanent – whole or universal. It often makes sense to lower the premiums through a second-to-die policy.