In this article, we examine the unique planning requirements for family members, such as children, grandchildren or parents, with special needs, which we will refer to as “special needs beneficiaries.” There are many misconceptions in this area that result in costly mistakes in planning for special needs beneficiaries. It is therefore incumbent upon us – the clients’ advisors – to ensure that clients understand all of their options.
COSTLY MISTAKE #1: Disinheriting the special needs beneficiary.
Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. Your clients may have been advised to disinherit their disabled child or other family member – who needs their help most – to protect public benefits. But these benefits rarely provide more than basic needs. And this “solution” does not allow your clients to help their disabled child or other family member after your client becomes incapacitated or is gone. When a disabled child or other family member requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others who love that disabled individual should consider establishing a Special Needs Trust, also referred to as a Supplemental Needs Trust.
Planning Tip: It is unnecessary and in fact poor planning to disinherit someone with special needs. Clients with special needs beneficiaries should consider a Special Needs Trust to protect public benefits and care for the individual during the client’s incapacity and after the client’s death.
COSTLY MISTAKE #2: Procrastination.
Because none of us knows when we may die or become incapacitated, it is important that our clients plan for a special needs beneficiary early, just as they should for other dependents such as minor children. However, unlike most other beneficiaries, a person with special needs may never be able to compensate for a failure to plan. A minor beneficiary without special needs can obtain more resources as he or she reaches adulthood and can work to meet essential needs, but a person with special needs may never have that ability.
Planning Tip: Parents, grandparents, or any other family members of a special needs beneficiary face unique planning challenges. This is one area where the client simply cannot afford to wait to plan.
COSTLY MISTAKE #3: Failure to coordinate a planning team effort.
It is critical that the advisor assisting with special needs planning include in the planning team:
- an attorney who is experienced in this planning area;
- a life insurance agent who can ensure that there will be enough money to maintain the benefits for the special needs individual;
- a CPA who can advise on the Special Needs Trust’s tax return;
- an investment advisor who can ensure that the trust fund’s resources will last for the beneficiary’s lifetime;
- a care manager; and
- any other key advisors that may support the goals of the trust going forward.
Planning Tip: Special needs planning dictates that the client’s advisors work together to ensure that there are sufficient trust assets to care for the disabled individual throughout his or her lifetime.
COSTLY MISTAKE #4: Ignoring special needs when creating the plan.
Planning that is not designed with the disabled person’s special needs in mind will probably render the beneficiary ineligible for essential government benefits. A properly designed Special Needs Trust promotes the special needs person’s comfort and happiness without sacrificing eligibility.
Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment & appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses: the sorts of things your clients now provide to their child or other special needs beneficiary.
Planning Tip: When planning for a loved one with special needs, it is critical that the client utilize a Special Needs Trust as the vehicle to transfer assets. Otherwise, those assets may disqualify the disabled person from public benefits and may be available to repay the state for the assistance provided.
COSTLY MISTAKE #5: Creating a “generic” Special Needs Trust that doesn’t fit.
Even some Special Needs Trusts are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the disabled individual’s public benefits, many trusts are not customized to the particular beneficiary’s needs. Thus the disabled individual fails to receive the benefits previously provided by his or her caretaker when the caretaker was alive.
Another frequent mistake occurs when the Special Needs Trust includes a “pay-back” provision rather than allowing the remainder of the trust to go to other beneficiaries upon the death of the special needs individual. While these “pay-back” provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your clients hundreds, thousands or hundreds of thousand of dollars, or even more.
Planning Tip: A Special Needs Trust should be customized to meet the unique circumstances of the disabled person and should be drafted by a lawyer familiar with this area of the law.
COSTLY MISTAKE #6: Failure to properly “fund” and maintain the plan.
When planning for a beneficiary with special needs, it is absolutely critical that there be sufficient assets available for the special needs beneficiary throughout his or her lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes, permanent life insurance is the perfect vehicle for this purpose, particularly if the clients are young and healthy so that insurance rates are low.
Also, because this is an ever-changing area, it is imperative that the clients revisit their plan frequently to ensure that it continues to meet the needs of the special needs beneficiary.
Planning Tip: Clients should consider permanent life insurance as the funding vehicle for special needs beneficiaries, particularly when the beneficiary is young, given the often staggering costs anticipated over that beneficiary’s lifetime.
If the client’s estate is potentially subject to estate tax, consider having an Irrevocable Trust own and be the beneficiary of the policy, naming the Special Needs Trust as a beneficiary of the Irrevocable Trust. Alternatively, in a non-taxable situation, consider naming the client’s revocable trust as the beneficiary to help equalize the distribution among multiple beneficiaries, if that is the client’s objective.
COSTLY MISTAKE #7: Choosing the wrong trustee.
During your client’s life, he or she can manage the Special Needs Trust. When the client is no longer able to serve as trustee, he or she can choose who will serve as trustee. At that point, options include a team of advisors and/or a professional trustee. Whatever the choice, it is crucial that the trustee is financially savvy, well-organized and, of course, ethical.
Planning Tip: The trustee of a Special Needs Trust should understand the client’s objectives and be qualified to invest the assets in a manner most likely to meet those objectives.
COSTLY MISTAKE #8: Failing to invite contributions from others to the trust.
A key benefit of creating a standalone Special Needs Trust immediately can be that the beneficiary’s extended family and friends can make gifts to the trust or name the trust as a beneficiary in their own estates. For example, these family members and friends can name the Special Needs Trust as the beneficiary of their revocable trust or will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.
Planning Tip: Creating a Special Needs Trust now allows others, such as grandparents and other family members, to name the trust as the beneficiary of their own estate planning.
COSTLY MISTAKE #9: Relying on siblings to use their money for the child with special needs.
Your client may be relying on their other children to provide for their child with special needs from their own inheritances. This can be a temporary solution for a brief time, such as during a brief incapacity if their other children are financially secure and have money to spare. However, it is not a solution that will protect the child with special needs after your client has died or when siblings have their own expenses and financial priorities.
What if the sibling divorces or loses a lawsuit? In the event of a divorce, a spouse may be entitled to half of the sibling’s asssets and will likely not care for the child with special needs. What if the sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for the special needs child as thoughtfully and completely as the sibling did?
Siblings of a child with special needs often feel a great responsibility for that child and have felt so all of their lives. The last thing that your client would wish upon his or her children is for an attitude of resentment to develop because they failed to plan for the special needs child, leaving siblings to bear the burden. When your clients provide clear instructions and a helpful structure, they lessen the burden on all their children and support a loving and involved relationship among them.
Planning Tip: Relying on siblings to care for a special needs beneficiary is a short-term solution at best. A Special Needs Trust ensures that assets are available for the special needs beneficiary (and not the former spouse or judgment creditor of the sibling) in a manner intended by the client.
COSTLY MISTAKE #10: Failing to protect the disabled individual with special needs from predators.
A Special Needs Trust funded through a will rather than by a revocable living trust is in the public record. Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts rather than a will, your client decides who has access to the inheritance information. This protects the special needs beneficiary, as well as other family members who may be serving as trustees, from predators.
Planning Tip: A Special Needs Trust created outside of a will ensures that information about the inheritance is not in the public record, protecting the special needs beneficiary from predators.
Planning for special needs beneficiaries requires particular care and the participation of an array of advisors to ensure that the disabled beneficiary’s needs are properly met. This is especially true when your client is no longer able to ensure that the disabled beneficiary’s needs are met. A properly drafted and funded Special Needs Trust helps to secure the disabled beneficiary’s future by managing assets to meet his or her needs, in the manner intended by the client, throughout the beneficiary’s lifetime.