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Estate Planning Techniques for the Disabled

  • Synopsis: Published: 2009-07-19 (Rev. 2010-07-21) - Article discusses essential estate planning techniques for families with disabled children. For further information pertaining to this article contact: Drew Hemmings.
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Article discusses essential estate planning techniques for families with disabled children.

Betty Smith, a retired businesswoman, is like many parents: her children are her first priority. Upon her death, Betty plans to divide all her possessions equally between her children. Although diagnosed with autism, Betty's youngest child, Michael, is a high-functioning adult, working part time at a local grocery store. Despite his success, Michael's condition requires that he receive personal care and supervision throughout his lifetime to maintain stability. Because of the unique care Michael receives Betty was never comfortable allowing a corporation or a law firm to design her family's future, and instead, she created a simple will permitting her older son, Bryan, to care for Michael and manage his estate following her death. Bryan, a doctor living in New York City, has always been available to help Michael, and despite having three children of his own, has always promised Betty that he would care for his younger brother should anything happen.

Unfortunately, too many families like Betty's overlook the importance of carefully crafting legal and financial safeguards to protect their children as they grow into adulthood. While Betty may have a simple request for her eldest son Bryan to care for Michael, creating a legal document stating her requests entails much more detail. Creating an effective estate plan concerns every family, but is even more important for parents looking to provide for a child with special needs because those parents often do not understand all the requirements and potential difficulties when designing their child's future. Failure to understand and establish estate-planning techniques unique to a parent caring for a special needs child can significantly affect the child's future and potentially lead to a loss of government protections normally administered to these families. Fortunately, after attending a conference for families with disabled children, Betty discovered essential estate planning techniques for individuals seeking to provide for a child with special needs. Specifically, Betty learned the importance of creating a specialized trust to reduce potential fees rather than only having a guardianship. Families with special needs children often overlook five essential estate planning techniques:

(1) determining qualification

(2) calculating appropriate funds to fulfill the needs of the disabled child

(3) determining which of the three types of special needs trusts would most effectively fulfill the child's needs

(4) selecting an appropriate trustee

(5) selecting an attorney to create a trust that will reflect the will of the parent. Mastering these techniques can save your family from financial hardship and ensure your children's wellbeing beyond your death.

Families use two primary methods when planning their estate for their disabled children. The first is establishing a guardianship where a bank is the manager of the grantor's assets and a lawyer or another family member is the guardian. While this method seems practical to many families, it leads to unnecessary expenses that substantially burden the family. Every year the lawyer must request that a local state court withdraw the funds from the bank for the benefit of the child. In addition to annual court costs, the attorney will likely charge substantial fees for his services. Furthermore, banks typically deduct one percent of the amount withdrawn as specialized banking fees. A family can avoid these costs through utilizing a more efficient alternative method: the special needs trust (SNT). Designed by the government as a specialized trust for families with disabled children, a SNT ensures a grantor's assets are allocated appropriately to the disabled child while minimizing attorney and banking fees.

Determining Whether Your Child Qualifies For a SNT

Whereas a SNT more efficiently protects the needs of a disabled child, the next step is to determine whether the child qualifies for special needs benefits. A SNT ensures that a disabled beneficiary who receives Supplemental Security Income (SSI) or Medicaid benefits remains protected upon receiving an inheritance (Elias 24-27). Eligibility for SSI or Medicaid is limited to individuals whose resources, including bank accounts and investments, do not exceed $2,000 dollars (Id. at 28). Therefore, an individual qualifying for these government benefits may lose this assistance upon receiving an inheritance of $2,000 dollars or more (United States). SNTs limit this danger by establishing a trust to be administered by an independent trustee for the exclusive benefit of the disabled beneficiary. Consequently, this preserves parents' rights to design their child's financial welfare without sacrificing necessary government health and financial protections (Cohen). Moreover, SNTs are not limited to the developmentally disabled and, according to the United States Supreme Court, include "any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of at least 12 months" (Barnhart v. Thomas). The Court reached this holding to protect individuals who are unable to maintain continuous employment due to an accident or disability (Id.).

Michael earns eight dollars per hour working fifteen hours per week at a local grocery store. In addition, the valuable autographed baseball collection left for Michael by his father as well as other personal items leave the value of Michael's resources fluctuating around $1,500 dollars depending on the money he saves. Upon his mother's death, Michael will be left with an inheritance in excess of $350,000 dollars. This inheritance will automatically disqualify Michael from receiving the Medicaid assistance that he has relied upon for professional assistance his entire life. Without setting up a SNT to administer Michael's assistance, he would inherit substantial funds but lose the stability provided by caretakers through Medicaid benefits and the security from having a trust administrator. By setting up a SNT, however, Michael's mother preserves the government benefits that have continuously protected Michael. Creating a SNT allows her to design an inheritance that will be administered to maximize Michael's welfare by enabling him to purchase baseball DVDs, tickets for Braves games, and other luxuries he is accustomed to receiving even though Betty may no longer be able to personally care for him.

Calculating Your SNT's Funds

After acquiring a firm understanding of the basics of a SNT, and whether your child qualifies, you should determine how much money should be included in the SNT so that the desired level of care can be given. Many parents mistakenly divide their assets equally among their children unaware that the disabled child's expenses usually differ from their other children (Begley). Effective estate planning for individuals with special needs requires that the money be micromanaged so that all health care, clothing, food, and entertainment expenses are pre-determined (Id). Public benefits, including Medicaid and SSI, that the individual receives do not necessarily last throughout the child's lifetime, so carefully planning for private care that the child may need in the future is essential to preserve the child's welfare (Id.). Failure to appropriately allocate funds for future private care could result in the child being forced into public housing for disabled individuals later in life (Id.). There, conditions can be far below what you desire for your child (Id.). Fortunately, proper consultation from a qualified attorney would help the family plan for these expenses, ensuring the child is provided with money to pay for private care as needed.

Betty designed her original will to divide $750,000 dollars equally between her two sons. Although seemingly appropriate, proper estate planning for individuals with special needs requires the grantor to calculate all foreseeable costs throughout the beneficiary's lifetime. Michael is extremely fortunate to have grown up with an excellent support system that has enabled him to grow into a working citizen. Psychologists and private care provider services have professionally structured Michael's schedule and provided academic support and entertainment when Betty was unavailable. Upon Betty's death, Michael will need these services twenty-four hours per day, amounting to roughly $6,500 dollars per year. Currently Michael is twenty five years old and if he lives to the age of seventy-five, his lifetime care costs will equal approximately $325,000. Considering other expenses that Betty finds essential to design the comfortable life to which Michael is accustomed, including entertainment, food, and a safe home, Betty, with attorney assistance should calculate Michael's expected living costs for fifty years. His living costs may exceed the $350,000 dollar amount originally planned, but determining the costs ensures that Michael lives a complete life. With effective planning, complications can be avoided, and a carefully designed estate plan can protect Betty's children. Similarly, any parent looking to devise a trust between multiple children must consider all foreseeable expenses to preserve their children's welfare; additional funds unused by the designated beneficiary may then be allocated to the surviving kin.

Types of SNTs

Every family has a unique vision for the future. Fortunately, SNTs flexibly adapt to different situations. Specifically, three primary forms of SNTs provide an array of choices for families to maximize their welfare. The first and most common form of a SNT is the standard "family special needs trust" (Foley). This kind of trust provides the beneficiary with funds for any purpose except for "basic needs" which consists of food, clothing, and housing that are already protected by Medicaid and SSI benefits (Id.). Upon creating this form of trust, families typically employ an attorney and a financial adviser to create the appropriate legal documentation and to monitor the distribution of funds. Moreover, this trust can be created inter vivos, where the trust is "living" and may be added to by any family member during their lives; the only person who cannot contribute to the trust is the benefiting disabled individual (Id.). Because Michael will be receiving a substantial inheritance, a "family SNT" should be utilized, and his mother should employ a qualified trusts and estates attorney as well as a financial adviser to properly create and manage the trust.

Some families choose a "pooled trust" version of a SNT (Foley). Conjoining families pool financial resources to establish an adequate trust (Id.). Like the family trust, the pooled trust allows any person to contribute to the trust for the benefit of the disabled individual (Id.). Pooled trusts uniquely collect funds from multiple families, representing the interests of more than one beneficiary (Id.). The funds in the trust are then divided among the recipients and may be used like any other SNT (Id.). A pooled trust allows families who are unable to afford banking services to create a large enough source of funding so that banks and law firms are willing to provide their services (Id.).

Finally, courts can create a "court-ordered special needs trust" when a disabled individual either receives substantial funds from a court settlement or inherits money without any formal protections that are necessary for a special-needs individual (Foley). A judge will order this trust when no other safeguards are in place for an inheritance, such as when the disabled individual is the only surviving relative of a deceased person without a will, or when an individual is injured in an accident and receives substantial benefits from a settlement. Unlike the other SNTs, the disabled individual directly owns the funds in this trust (Id.). Because the government has especially approved the trust, it permits direct ownership, but requires a trustee to oversee the distribution of funds to the beneficiary (Id.). Though seemingly complex, the government has created SNTs to flexibly adapt to situations unique to each family.

Selecting an Appropriate Trustee

One of the most significant challenges families face when creating a SNT is selecting an appropriate trustee to oversee the management and distribution of funds for the disabled individual. Courts define a trustee as any person willing to control the legal title of property with a fiduciary duty for the benefit of another ("Trustee"). Courts will permit either an individual willing to oversee the trust or a corporate entity that seeks compensation for its administrative services. Granters often mistakenly designate another family member as the trustee without understanding the accompanying immense responsibilities (Black's Law Dictionary). For example, Betty appointed her eldest son Bryan as the trustee for Michael's estate. Although Bryan only has the best intentions to care for Michael, becoming the trustee for his SNT would be an immensely stressful task.

Trustees are responsible for keeping accurate records of funds, investing assets, making proper distributions of funds to the disabled beneficiary, and preventing the disabled individual from using the funds on resources such as food and housing that will disqualify him from receiving public benefits (Begley). Additionally, trustees "must comply with the Prudential Investor Act, the Principal Income Act, and must be familiar with the rules of SSI, Medicaid, and any other governmental programs that may benefit the disabled individual" (Id.). Bryan, a doctor in New York, has little time or training to oversee the management of Michael's SNT. By placing him as the exclusive trustee to Michael's ultimate wellbeing, Betty has jeopardized not only the proper management of the SNT, but she has also unnecessarily burdened Bryan's family with increased pressure to manage an estate without the time or the proper training.

Another danger when selecting a trustee is appointing a corporate guardian to oversee the management of the funds who lacks familiarity with the disabled individual's needs, training with SNTs, or ethics to responsibly administer the trust. Many families often assume only a family member knows the disabled individual well enough to understand his unique needs and act in the individual's best interest. These fears are often warranted when attorneys lack a proper understanding of special needs trusts and how they are administered differently from regular trusts and subject to different restrictions and benefits.

Fortunately, law firms and other professional services are becoming more familiar with the complexities of SNTs as awareness of disability law grows. Today, most firms are increasingly familiar with creating different kinds of SNTs and have experience managing SNTs for clients with a wide variety of disabilities. Still, where granters prefer to have a family member involved as a trustee, "co-trustees" may be appointed to administer the SNT (Begley). Co-trustees typically consist of a lawyer who provides the knowledge and professional experience that is necessary to effectively manage the trust on a day-to-day basis (Id.). The other trustee can be a family member or friend who oversees the trust and ensures the funds are distributed or invested to maximize the welfare of the disabled individual (Id.). Ultimately, with careful planning, the correct attorney, and with your family, a proper SNT can preserve your children's wellbeing following your death.

Conclusion

After learning Michael qualified for a SNT, and the amount of funds necessary to leave in the SNT to take care of Michael for life, Betty was able to explore the different types of SNTs that are available to take care of Michael. Finding a family SNT most appropriately fulfilled Michael's needs, Betty then learned the dangers of using her son Bryan as the exclusive trustee, and employed a local trusts and estates firm to act as a co-trustee that manages the investment and distribution of Michael's funds. By successfully designing a SNT for her disabled child, Betty ensured Michael's life-long wellbeing while protecting the rest of her family from added stress.

Selecting the appropriate SNT for your child is one of the most important things you can do to preserve his or her future. To avoid the common pitfalls many families face, it is essential that you research the different kinds of SNTs and contact a trusted attorney that can create a trust that reflects your long-term intentions.

About the Author:

Drew Hemmings is a rising second-year student at Emory University School of Law and a Summer Associate at Hartman Private Law, a trusts and estates firm located in Atlanta, Georgia. His volunteer commitments include the Marcus Autism Center, The Arc of Orange County, the Open Door Community Soup Kitchen, and Emory Law's Homeless Advocacy Project. Drew graduated from the University of North Carolina in May, 2007 with a B.A. in Political Science and Phi Beta Kappa honors.

Article courtesy of www.hartmanprivatelaw.com

References:

Barnhart v. Thomas, 540 U.S. 20 (2003).
Begley, Thomas D. "Two Big Problems with Special Needs Trusts." New Jersey Law Journal 176 (2003). 31 May 2003 www.begleylawyer.com/documents/SNT_2.pdf
Cohen, Nina L. "Unique Concerns for Special Needs." New Jersey Law Journal 180 (2005). 9 May 2005 www.archerlaw.com/files/articles/cohen_050905.pdf
Elias, Stephen. Special Needs Trusts: Protect your Child's Financial Future. Berkeley: Nolo, 2005.
Foley, Tom. "Supplemental Needs or Supplemental Needs Trusts." World Institute on Disability. 22 Jun. 2009 www.wid.org/programs/access-to-assets/fact-sheets/special-needs-or-supplemental-needs-trusts.
"Trustee." Black's Law Dictionary. 8th ed. 2004.
United States. Social Security Administration. "SSI Eligibility Requirements." 22 Jun. 2009 www.ssa.gov/ssi/text-eligibility-ussi.htm






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