Thirteen Estate Planning Tips for Beneficiaries with Special Needs

Life is more complicated for families who have a loved one with a disability. From finding the right medical professionals and the right schools or other programs, to obtaining necessary therapies and services, individuals with disabilities face additional steps, extra time and a need for specialized knowledge at every stage of life. In addition to facing these stresses, families may receive misinformation, which makes decision making more difficult.

Planning for Beneficiaries with Special Needs

While the development of an estate plan can be difficult for any family, for a family of an individual with a disability, the planning, as with all things, has added complexity. Primary caretakers of a loved one with a disability routinely wonder who’ll care for, love and financially support their family member when they’re gone. They ask themselves questions like the following:

• Where will my loved one live?
• Who will make sure my loved one is happy and well cared for?
• What services will be available for my loved one?
• How will these services be paid for?

Needless to say, it’s recommended that all families engage with an estate-planning attorney, but for families with a loved one with special needs, the process of developing an estate plan requires more than document drafting skills. It also requires the ability to navigate the confusing and often counter-intuitive rules of government benefit eligibility and being intimately familiar with the circle of doctors, diagnoses, therapies and services that will be available to provide special needs support over the course of a lifetime.

If your client’s family includes an individual with special needs, here are 13 tips to get him started on the right track to developing an estate plan that works for his family:

1. Letter of Intent

This letter informs trustees, guardians, advocates and others involved in the care for the client’s family member with a disability about the family member’s functional abilities, routines, interests and likes and dislikes. This isn’t a legal document but a practical one. It should be drafted using a conversational voice and should grow with the family member and be updated regularly. A guide to drafting a Letter of Intent can be found here.

2. Special Needs Trust

Sometimes called a “supplemental needs trust” or “SNT,” this specialized trust allows assets that clients contribute to it to pay for goods or services that are in the beneficiary’s best interest, while also maintaining the beneficiary’s eligibility for means-tested government assistance programs. In planning for an individual with special needs, money isn’t everything—there may be residences or programs that require the person with special needs to be eligible for benefits such as Medicaid or Supplemental Security Income and don’t accept private payment. An SNT allows the beneficiary to have the best of both worlds.

3. Help the Trustee

The letter of intent provides some guidance to the trustee concerning how your client envisions supplementing his family member’s care, but he may also want to include specific language in the SNT to inform distributions. Specifically, he may want to authorize the trustee to hire care managers, advocates and other professionals who can guide the trustee on the expenditure trust funds.

4. Avoid Court Intervention

When you prepare the client’s plan, it’s ideal to avoid or minimize the role of court-appointed guardians or trustees. Typically, once the matter goes to court, the court will have a say in your client’s family member’s care, and litigation of course is time consuming and financially burdensome for all involved. Set up the SNT during your client’s lifetime, not in his will, as trusts created by will are typically subject to a court’s interventions.

5. How Much to Fund?

Your client should consider the beneficiary’s current lifestyle and how much money will be ideal to support it. Keep in mind that because of a variety of factors, your client may choose to allot more or less to the individual with a disability than to similar beneficiaries who don’t have a disability.

6. Don’t Underfund the Trust

If your client doesn’t have sufficient assets to fund the SNT immediately, consider life insurance that will fund the trust, which is often a good solution for a young family; and …

7. Don’t Overfund the Trust

If your client’s family is wealthy, consider capping the amount left to the SNT or using a pot trust or a sprinkle provision to allow the trustee to use trust assets in excess of a certain amount for other family members.

8. Use Non-Retirement Assets

Retirement accounts have their own set of specific planning considerations that make them a less than ideal method of funding a SNT; for this reason, this should be avoided when possible. If your client needs to fund the SNT with retirement assets, it’s essential that the SNT be set up to qualify as a designated beneficiary and that care is taken in designating remainder beneficiaries. The best course of action is to fill out the designation of beneficiary forms for the asset to ensure smooth funding.

9. Select a Trustee

The trustee is the quarterback of the plan who can hire financial advisors, attorneys, accountants, bookkeepers, social workers and care managers. The trustee can delegate but must oversee everything. Corporate trustees are an option if the trust is large enough. A client should look for a bank with special needs experience and a willingness to administer an SNT. If your client uses a corporate trustee, advise adding an individual family member or friend as a co-trustee to work with the corporate trustee who has expertise in SNTs.

10. The Trust is Not Enough

The special needs estate plan goes beyond just ensuring that the SNT is properly set up. You must also make sure that your client’s other estate-planning documents, like powers of attorney (POAs) and trusts, are set-up to take the SNT into account. For example, the POA should give someone the power to fund the SNT with assets and the will or any other trusts from which there’s even a remote possibility that a loved one with a disability will inherit. It should reflect that any distributions that would otherwise go to the individual with a disability instead be diverted to the SNT.

11. No Outright Gifts

If a client determines anyone wants to leave something to the disabled beneficiary, you should provide language that he can pass on to those family members that will allow them to divert their bequests to the SNT. This will avoid the need for a guardian, a loss of eligibility for needed benefits or other complications. Additionally, your client may need to review any existing family trusts, especially life insurance trusts or gifting trusts that would distribute directly to the beneficiary with a disability. Look for provisions in which your client’s family member with a disability is a contingent beneficiary and determine if he has rights of withdrawal, as either of these circumstances could interfere with his eligibility for needed benefits.

12. Consider an Exempt Trust

If your client’s family member with a disability already has money in their name, there’s another type of SNT allowed under federal law, commonly referred to as a “d4a” or “d4c” trust, that can be funded from funds belonging to an eligible person. ABLE accounts may also be an option for preserving a person with a disability’s assets for their use while maintaining their eligibility for government benefits. Determine which type of exempt trust would be best suited for your client’s family member’s circumstances.

13. Partition Funds

Please note that funds belonging to the individual with a disability should be kept strictly separate from any third-party funds, as the rules requiring payback to the state for the cost of benefits when a beneficiary dies, if properly managed, will attach only to funds owned by the individual, or “first-party” funds.

Read the story on Wealthmanagement.com here.