ESTATE AND FINANCIAL PLANNING
Estate Planning for a Family with a Special Needs Child

By Sebastian V. Grassi Jr.

This article is a general overview of issues that a lawyer may need to address when preparing an estate plan for a family with a special needs child.

Special needs challenges and responses. The parents of a special needs child are faced with five unique estate planning challenges: (1) how to provide for all of their loved ones without jeopardizing the special needs child’s eligibility for means-tested government benefits such as Supplemental Security Income (SSI) and Medicaid; (2) how to design an estate plan that supplements the special needs child’s means-tested government benefits and enhances the quality of the child’s life; (3) how to treat the other children equitably while providing for the special needs child; (4) how to make sure sufficient funds are available at a parent’s death to care for the child; and (5) how to provide for the proper supervision, management, and distribution of an inheritance for the special needs child through a third-party created and funded special needs trust (SNT).

Of these five unique estate planning challenges, items (4) and (5) typically prove to be the most difficult to implement. This is especially true if most of the parents’ estate is composed of retirement benefits, if there is no trustee in the parents’ special needs child’s vicinity who is experienced in administering SNTs, or if there is an experienced trustee available but its minimum fee is too high relative to the proposed size of the SNT.

At a minimum, the parents should have the following five estate planning documents prepared: (1) a last will and testament; (2) a general durable power of attorney (GDPA) for financial affairs that permits the agent to make discretionary nonsupport distributions to or for the benefit of the child and to establish a third-party created and funded SNT for the benefit of the child; (3) a durable medical power of attorney; (4) a revocable living trust containing language permitting the trustee to make discretionary nonsupport distributions to or for the child’s benefit; and (5) a third-party created and funded SNT.

Five estate planning options are available to the parents: (1) distributing assets outright to the child (not recommended because the assets may disqualify the child from receiving means-tested government benefits); (2) disinheriting the child (generally not recommended because the child will have no “safety net” if government benefits are subsequently reduced or eliminated); (3) leaving property to another family member for the child’s benefit (not recommended because the arrangement is not legally enforceable and the siblings’ creditors may be able to seize the assets); (4) establishing a third-party discretionary support trust for the child (not recommended because the trust will, in many states, disqualify the child from receiving means-tested government benefits); and (5) establishing a third-party created and funded SNT (highly recommended because the trust will not disqualify the child from receiving means-tested government benefits).

The third-party created and funded special needs trust. Of these five options, practitioners generally prefer that parents establish an inter-vivos stand-alone, third-party created and funded SNT. Under existing law, assets contained in a properly drafted and administered third-party created and funded SNT are not considered to be “available” to the special needs child for determining the child’s financial eligibility for means-tested government benefits. Also, there is no requirement that Medicaid be repaid from the third-party created and funded SNT when the child dies or if the trust terminates during the child’s lifetime.

Because the trustee of the SNT is given complete discretion in making distributions to or for the child’s benefit, the choice of who should serve as the trustee of the SNT is important. The selection of the trustee involves many considerations, including the trustee’s ability to understand and respond to the child’s needs; the trustee’s knowledge of government benefit programs and the effect that trust distributions will have on the child’s government benefits; the trustee’s health, integrity, reliability, and financial acumen; the trustee’s potential for a conflict of interest if the trustee is a current or remainder beneficiary of the trust; and the potential for adverse income and transfer tax consequences if a family member serves as a trustee and is also a current or remainder beneficiary of the trust.

Coordination with other relatives’ estate plans. The principal purpose of a third-party created and funded SNT is to provide an inheritance for the special needs child without risking the loss of important means-tested government benefits. Consequently, it is important that grandparents and other relatives do not leave an inheritance outright to a special needs loved one.

A corollary to the need to co- ordinate a special needs child’s inheritance with other relatives is the need to review all possible ways a special needs child could receive property, an inheritance, or a gift. For example, the following common assets and applicable beneficiary designations are examples of assets that should be reviewed to make sure they will not be paid directly to the special needs child: IRA, 401(k), or other retirement benefits; life insurance; any property not subject to the parents’ will or trust; and joint accounts.

Managing assets already owned by a special needs child. If a special needs child who is disabled has received an inheritance, gift, bequest, lawsuit award or settlement, child support, alimony, or divorce property settlement, the child’s receipt of these assets can result in the disqualification of means-tested government benefits. To preserve these benefits, the child’s disqualifying assets should be converted into “exempt” or “non-countable” assets or transferred to a first-party self-settled SNT that is government approved. The first type of safe harbor first-party self-settled SNT is an inter-vivos irrevocable trust established under 42 U.S.C. § 1396p(d)(4)(A), commonly referred to as a “(d)(4)(A) SNT” or a “(d)(4)(A) Medicaid payback trust.” A (d)(4)(A) SNT is best suited for a significant amount of resources that can sustain a professional trustee’s minimum fee schedule. By statute, it must contain a Medicaid payback provision on the death of the special needs child. The second type of safe harbor first-party self-settled SNT is an inter-vivos “pooled account trust” established under 42 U.S.C.§ 1396p(d)(4)(C), commonly referred to as a “(d)(4)(C) SNT” or a “(d)(4)(C) pooled account trust.” A (d)(4)(C) SNT is administered by a nonprofit charitable association, which also acts as the trustee. The child’s disqualifying assets are transferred into the master trust, and a separate trust account is established by the nonprofit charitable association for the child’s sole benefit. For purposes of investment and management of funds, however, the master trust pools all the separate trust accounts. A (d)(4)(C) pooled account trust is best suited for a situation in which the amount of non-exempt assets owned by the special needs child is not large enough to justify the cost of establishing and administering a (d)(4)(A) SNT or when the parents or child want to ultimately benefit the mission of the nonprofit association on the child’s death.

Adult special needs child. If an adult special needs child lacks the ability to make informed medical or mental health decisions or to give consent to the release of confidential medical information, parents should consider two options. If the child is mentally competent under applicable state law, have an estate planning attorney prepare a durable medical power of attorney that includes HIPAA release information and names each parent as a “personal representative” under the HIPAA rules so that the parent can legally request and receive confidential medical information. If the child is mentally incompetent, obtain a guardianship over the child for medical treatment purposes.

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