General Practice, Solo & Small Firm DivisionMagazine
Special Needs Trusts
Planning for a Child with Disabilities
BY EDWARD D. BEASLEY
© American Bar Association. All rights reserved.
Edward D. Beasley is a partner in the Concord, New Hampshire, law firm of Beasley and Ferber, P.A. He is chair of the ABA General Practice, Solo and Small Firm Division’s Elder Law Committee, and has been a panelist at several elder law and estate planning CLE seminars.
As an elder law specialist, versed in a number of asset protection strategies for my elderly clients facing the prospect of financial ruin due to a prolonged nursing home stay, I was both surprised and happy to be asked to contribute to this issue of The Complete Lawyer.
I was surprised because most folks do not see a correlation between elder law (i.e., planning for the elderly) and planning for children with disabilities. In fact, our firm does more planning on the two ends of the spectrum—planning for young people with disabilities and for the elderly—than any other firm I have encountered.
Elderly clients and children with disabilities (often called children with "special needs") have much in common. From a logistical standpoint, they are either totally or partially dependent upon others, either their families or the government, to provide for them. From a legal standpoint, they are the least able to protect themselves and their assets from governmental confiscation as reimbursement for services rendered on their behalf by the government.
In most states, the amount of money such a person is able to maintain in his or her own name (sometimes called a "resource limit") is approximately $2,000; any money in excess of that amount must be "spent down" to that rather meager amount, at which time applicable government programs will be made available to the person. Applicable government programs include Social Security Administration benefits, Veterans Administration benefits, Supplemental Security Income (SSI), U.S. Civil Service Commission benefits, state medical benefits and Medicaid, and any other applicable program available in the planner’s particular state.
As with planning for the elderly, planning for children with disabilities is never a "one size fits all" proposition; each case must be reviewed based on its own unique characteristics. Invariably, however, the planning involves the drafting of a special needs trust (SNT), sometimes called a supplemental needs trust. The SNT protects the assets placed in it from the government while maintaining governmental benefits available to the child, providing a source of funds to augment, not replace, those governmental benefits.
This article does not present all of the variations and situations that could arise in the context of planning for children with disabilities. Rather, it is influenced by the cases that have been handled by myself or my firm during my 19 years of practice. This article does not depict every possible technique involved in planning for children with disabilities, but rather is a plain-speaking article that describes real-life situations.
Lawyers must be aware of the sensitivities of the parents of the children for whom we are planning. I give approximately 12 speeches per year to groups of such parents. Prior to the speech, I pull aside my host or a parent (whom I know is active and up to date on terminology) and ask what words are acceptable and what words are not in describing special needs children. Although parents may refer to their child as disabled, lawyers and other outsiders may want to use the proper terminology—the "special needs child" or the "child with a "disability." As I preface my speeches and this article, I mean no disrespect or lack of courtesy by using words such as "disabled." In my experience, parents take no offense when none is intended.
Often, the adult parents of children with disabilities are unaware of the problem their existing estate plan presents. Being unaware of governmental confiscation, many clients draft simple wills leaving everything in equal shares to their children, including the one with the disability. The problem with this strategy is obvious—loss of the disabled child’s inheritance.
In other instances, being aware of the problem, they have drafted a will disinheriting the child with a disability or leaving the disabled child’s share to the other children with the understanding that the other children will hold that share in some type of informal trust to augment the benefits being supplied the child with the disability. Most times, parents faced with such a situation do not feel comfortable with the notion of disinheriting their child with a disability. In fact, often the family wants to leave more, not less, to the disabled child.
Leaving the "extra" share to well-meaning siblings seems reasonable at first blush, but problems can and do occur. What happens if the sibling with the "extra" share to be held for his sibling dies and leaves the assets to his spouse? What happens if that sibling incurs a creditor liability that causes the loss of the "extra" share? What about divorce? What about college loan applications where assets held by the "normal" sibling are counted toward financial need? Among others, these are the reasons a SNT should be established.
Special Needs Trusts
In my practice, the most common type of SNT is created under a revocable living trust prepared by the parents of the child with the disability. It is intended to spring into existence only after the grantors have died. After all, that is the time the parents are concerned about most—the time when they are not there to look after the care and attention given to their child.
Our choice of the revocable living trust is based upon New Hampshire’s somewhat burdensome probate process. By creating the SNT under a revocable living trust, as opposed to a testamentary SNT, the trustee keeps the matter private (the revocable living trust, and therefore the SNT, does not get recorded in New Hampshire) and the trustee is relieved from posting a bond and making annual accountings to the probate court. The only downside to this method is we do not have the checks and balance afforded by the accountings due to the probate court by the trustee. For the handful of situations where this setup caused the parents concern, the compromise was to make a bank or trust company rather than a family member the successor trustee of the SNT. Thus, the independent trustee has to account to the family, not the courts, on a regular basis for expenditures from the trust.
In many instances, we establish a "stand-by" or "stand-alone" SNT, which is created during the lifetime of the parents. This SNT’s purpose may be to receive the proceeds of a life insurance policy, often a "joint and survivor" or "second to die" policy on the lives of the parents, the proceeds of which create the corpus of the SNT. In this case, the parents can use the power of life insurance to provide more for their disabled child than they could from their own estate not augmented by the life insurance.
Bequests. With a "stand-by" SNT, additions can be made at any time by the family. It is a vehicle through which grandparents and other relatives can make bequests to the child without the bequests being subject to government confiscation. Instead of leaving a bequest to John Smith, a bequest can be made to the John Smith Supplemental Needs Trust. In this regard, families with a child with a disability must know what their relatives, particularly parents or single siblings, are planning.
One problem arises in the case of the relative—a parent or sibling—who leaves assets to a parent with a disabled child, along with the provision that if the parent is not then living, the inheritance passes to the parent’s issue by right of representation. In this situation, the share directed to the child with a disability will be exhausted by the government as a condition of keeping governmental benefits. Conse-quently, planning for the child with a disability extends beyond the immediate family or parents and siblings. Grandparents, uncles, aunts, and anyone else who might leave the disabled child an inheritance need to know that without proper planning, the bequest will be lost to the state.
Settlements. An SNT can also be established to hold monies coming into the hands of a child with a disability as a result of a personal injury lawsuit—called a "self-settled trust." To establish such a trust, the person with a disability must be under 65 years of age. The trust must be set up by a relative, a guardian, or the court and not by the person with the disability. The trust must provide that upon the death of the beneficiary, Medicaid will be reimbursed for monies expended for the disabled child’s care. This trust makes specific reference to the settlement or judgment that resulted in the funds to be protected, the purpose of the trust (to augment but not replace other governmental benefits to which the child is otherwise entitled), and the trustee’s discretionary powers to make distributions.
To establish a self-settled trust: (1) the parties, plaintiff’s attorneys, and those for the defendant must agree on a settlement; (2) both parties must petition the court for approval of the settlement concurrent with the establishment of the SNT; and (3) the judge must approve the transfer of the settlement funds to the trust. New Hampshire allows such trusts to be established, unlike Medicaid planning techniques such as Medicaid trusts, which our courts have consistently not allowed. (For more information on setting up a self-settled trust, see Matthew J. Marcus, Esq., Supplemental Needs Trusts: Estate Planning for Families of Children with a Disability, Copyright MEDLAW, 1996.)
Elderly parents. A final type of SNT, of which too few lawyers are aware, can be created by elderly parents who wish to transfer assets to an SNT but live in fear that the period of Medi-caid ineligibility for them, the parents, may not have elapsed by the time they need nursing home care, and so they will be disqualified from Medicaid. Happily, this scenario can be avoided with a properly drafted SNT if the sole beneficiary is a permanently and totally disabled child. The SNT must provide that upon the child’s death, payment of the balance of the trust is to be made to the disabled person’s estate, thus ensuring governmental reimbursement.
One Size Does Not Fit All
Once the necessity of such a trust is determined and the basic legalities are understood, the SNT is drafted for the particular child. The language used depends on the exact nature and extent of the disability. This is unlike the basic revocable living trust, where one size often fits a majority of clients.
I generally prefer the trustee, if financially capable, to manage the assets of the trust; why incur additional expenses or management fees in employing an independent trustee? My bias may be based upon my experience, which is slanted toward smaller estates rather than larger ones. Where possible, I also like the trustee to be the guardian of the disabled child. It is not uncommon, however, for these tasks to be held jointly among siblings or for one to be trustee and the other the guardian. Only the client knows what will be best for the child with the disability.
In addition to the usual provisions found in any good SNT, such as "these assets are not deemed to be assets of the beneficiary" or "the purpose of this trust is to augment, not replace, governmental benefits to which the beneficiary is otherwise entitled," I like to further fine-tune the meaning of "special needs" planning. Provision should be made for vacation trips and visits to relatives. Also, provisions should be made for the trustee to apply on behalf of the beneficiary for any governmental benefits the beneficiary may be entitled to but is not receiving. Provision should be made to allow the beneficiary to make small gifts to relatives and friends.
In my planning in this area, invariably a heavier burden is placed on the trustee than in "normal" trust planning. If the trustee is a family member, I prefer to see provisions put in place to make certain the beneficiary is being treated correctly in his or her surroundings. I usually insert provisions outlining the following responsibilities of the trustee: arranging for at least quarter-annual visits; arranging for independent dental and physical exams; evaluating the work and earning opportunities available to the beneficiary; evaluating the recreation, leisure, and social needs of the beneficiary; determining the appropriateness of the existing residential and program services of the beneficiary; and determining the legal rights of the beneficiary for public assistance, including food, housing, and clothing.
The common theme, repeated throughout the trust, is that the assets are not deemed assets of the beneficiary, but rather are held in trust to "augment" existing benefits. Any distribution made to a care provider for a "necessity" such as food or shelter should always come from the beneficiary’s supplemental income—not trust income. The trustee may, from the trust, directly pay for "non-necessities" such as recreation and vacations. If the trust is not designed so that the state or the beneficiary’s estate is the final beneficiary of any balance in the trust when the beneficiary dies, provision must be made for that balance. Generally, it goes to the disabled child’s issue, if any; if not, it goes to the grantors’ then-living issue by right of representation.
Several years back, I wrote an article entitled "Special Needs Children Are Special." I still feel very much that way. Nothing gives me more satisfaction than working through a difficult assignment involving a family with a disabled child. On average, my fees are substantially less for the work I do for these folks than for some of my wealthier clients, but the satisfaction is often substantially greater. CL
For More Information
If you are interested in learning more about planning for a disabled child or for the elderly, Third-Party and Self-Created Trusts: Planning for the Elderly and Disabled Client, by Clifton B. Kruse, Jr., can help. Completely up-to-date with dozens of real-world examples, this book ($89.95; $79.95 for ABA Real Property, Probate and Trust Section members) will help you choose and draft trusts ensuring that the beneficiary is not disqualified from receiving government benefits. To order, call the ABA Service Center at 800/285-2221. Refer to PC 5430394.