This estate planning tool can provide for people with disabilities without jeopardizing their government benefits.
There is one aspect of estate planning that not everyone has to do but is very important to those who need it: planning for the future of a child with disabilities.
This could include a child who was born with a mental or physical disability or one who became disabled later in life and needs someone to oversee his or her affairs.
"Planning ahead is so critical," says Scott Suzuki, a lawyer in Honolulu who is president of the nonprofit Special Needs Alliance. "We never know."
The vehicle many families choose is a special needs trust, sometimes called a supplemental needs trust. The trust can be established while the parents are still alive or be part of a will that calls for the trust's creation when they die. The purpose of a special needs trust is to provide for a person with disabilities without jeopardizing government benefits such as Supplemental Security Income payments, Medicaid or food stamps.
Parents don't need to be fabulously wealthy to require such estate planning. A bequest of more than $2,000 could make the child ineligible for federal programs until all the money is spent. While the loss of $733, the maximum monthly SSI disability payment, may not be significant, losing Medicaid health benefits could be huge for someone with complex medical problems.
"Typically, it's done when there's a large sum of money," such as a malpractice or accident settlement, as well as an inheritance, says Daniel Williams, a financial planner who is vice president and trust advisor at Bryn Mawr Trust in Pennsylvania. "You don't want them to receive an inheritance because you'll kick them off benefits."
The rules of special needs trusts are complex, and it's best to have one drawn up by a lawyer who specializes in that area. The Special Needs Alliance is one source of referrals. The trust will need to meet both federal and state standards, and decisions may be subject to court approval.
"The rules are intricate, and the supervision is always there from the courts," Williams says. For example, a special needs trust can't pay for food and shelter, but it can pay for clothing, computers, education, aides and equipment such as wheelchairs, hearing aids and braces.
Another factor to take into account is that the challenges individuals with disabilities face can vary. Someone who requires round-the-clock custodial care will have very different needs from an adult with developmental disabilities who can cook for herself or a person with physical disabilities who has a career and can manage her own financial affairs.
That makes drawing up exactly the right trust, as well as other legal documents that may be needed, a complicated task. "We approach it on a case-by-case basis," Suzuki says. "They can be really very specialized, depending on the needs of the individual. There's as wide a variety of special needs trusts as there are disabilities."
Failing to follow the complex rules required by the Social Security Administration and state social service agencies also can endanger public benefits. Plus, the money needs to be managed to last throughout the life of the person with disabilities.
"We may need these funds to last 30 or 40 years," Williams says. "We want to make sure we do everything right in the beginning through the life of the trust. There is a good bit of skill that goes into administering these things properly."
Money from a special needs trust must legally benefit the person with disabilities, not the family. That means, for example, if the beneficiary pays for a new home from the trust that the entire family will live in, the rest of the family is required to contribute to the cost. One parent can be paid from the trust as a caregiver, but not both parents. "The funds are earmarked for the beneficiary, not for the family as a whole," Williams says.
Here are eight things to consider when planning for the future of an adult child with disabilities:
Does the child now need or will he or she ever need government benefits? If so, arrangements must be made to provide for the child's needs without jeopardizing those benefits, usually through a trust. A consultation with a lawyer who specializes in these issues is a good place to start.
Is there a settlement from a lawsuit or other source? A large settlement from a malpractice suit or an accident needs to be managed in such a way that the beneficiary gets what he needs, the money lasts and the beneficiary can collect government aid, if needed.
What company will manage the trust? Managing a special needs trust is complex and best done by companies that specialize in that job. Some companies work only with large amounts of money, $250,000 or more, while others will handle smaller amounts such as $25,000. Another option is a pooled trust run by a nonprofit, which manages money for many people with disabilities and may keep the balance of the money when the beneficiary dies. With a third-party special needs trust, "They can maintain so much more control. They can make it so much more specialized," Suzuki says, including designating heirs when the beneficiary dies.
Who will be the trustee? Because the rules of managing a trust are so complex, most lawyers advise contracting with an expert. Fees average 1 to 1.5 percent, Williams says.
Will a family member act as co-trustee or guardian? This option lets a family member approve the trust accounting and make the requests for a person with disabilities who can't do it himself.
Where will the child live? Money from a special needs trust can't be used for housing or food if the person with disabilities received government benefits. If the $733 a month in SSI payments won't cover housing, and the person can't work, it's important to explore other options.
Are other documents needed? In the eyes of the law, a person 18 and older is considered an adult. If a parent or other relative needs to make decisions, documents providing for guardianship, health care surrogate, power of attorney or other functions may be required.
Is a new ABLE account a better choice? Legislation signed in late 2014 established accounts similar to 529 college savings plans for people with certain disabilities diagnosed before age 26. The federal government and state governments are still establishing the extra rules, though the accounts should be available in many states by the end of the year. In general, family members can contribute up to $14,000 a year to the accounts tax-free, and recipients could keep their government benefits until the accounts exceed $100,000. After that, they would lose SSI but remain eligible for Medicaid. These accounts would be less restrictive than a special needs trust, though experts say some people with disabilities may need both options.