Special Needs Trusts
The mere idea wrenches the heart of any parent: if untimely death or disability strikes, who will care for your children?
Because no one is immortal, most of us recognize the need for an estate plan, preferably one that appoints a suitable guardian for our children, sees to their financial needs, and avoids probate.
In the best of circumstances, it's a task requiring clear thinking and good legal advice. But when a child has special needs, the challenge intensifies.
Before we explore estate planning strategies for parents of special-needs children, let's look at why all parents need an estate plan.
A Page From Oliver Twist
"A ward of the court" may sound like something out of the nineteenth century. But that's precisely what becomes of children whose legally disabled or deceased parents have failed to plan for their care.
Unless you've left behind an estate plan that spells out who should assume responsibility for your child, the courts will step in.
And that's true whether you've left behind an estate worth millions or nothing at all.
When children take center stage in probate court, it's because the court wants to ensure that a responsible person is supervising their physical needs and financial affairs.
The court will appoint a guardian to assume responsibility for your child's personal care. To oversee your child's financial affairs, the court will appoint a financial guardian or conservator.
Often, the financial guardian or conservator is not one person, but an entity, such as a bank or a professional money management institution.
Probate judges have tremendous discretion in whom they may appoint as guardians and conservators. So, there's very little assurance that the judge's appointments will be the same individuals you would choose.
In fact, if qualified family members aren't available or deemed suitable, the judge may very well appoint professional guardians and conservators who may be strangers to you and your child.
Both guardian and conservator will be supervised by the probate court judge assigned to your child's case.
The conservator is usually required to obtain judicial approval before undertaking any significant financial transactions on your child's behalf. Busy schedules and heavy caseloads often mean that it can take weeks -- or even months -- before a financial transaction can be reviewed and approved by the supervising judge. That may create devastating delays in providing care and comfort for your child.
Because the court is involved in supervising their activities, guardians and conservators frequently hire attorneys to help them navigate through the legal system.
The fees for these attorneys -- as well as the fees charged by the conservator, guardian and the probate court itself -- all come out of the estate you've left behind for your child's benefit.
These expenses leave less money to provide for your child's medical care, therapy, education, and other requirements.
Upping the Ante: Planning for the Special-Needs Child
Clearly, every parent has a responsibility to plan for the unthinkable. But when the child has physical, emotional or mental challenges, careful estate planning is even more crucial, for two important reasons.
First is the simple fact that these children have greater needs. Depending on the degree of their disability, they may require specialized treatment that encompasses therapy, housing, education, adaptive equipment, in-home care, among many other costly services.
The need for this care may extend throughout their childhood and last well into adulthood, or even their entire lives. Providing the appropriate degree of care requires careful financial planning.
Here's the other critical reason why parents of a special child need a special estate plan: it is the only way to ensure that the legacy you leave won't jeopardize your child's eligibility for government and private benefit programs.
The Horns of a Dilemma
Until 1993, it was a painful dilemma the parents of special children could not avoid: to keep a special-needs child eligible for important federal and state benefit programs, the child could have no assets.
That left parents with a difficult choice: provide a legacy for their special child and hope it would be sufficient for all his needs, or leave the child a virtual pauper and retain his eligibility for government assistance.
When the federal government enacted the Omnibus Reconciliation Act of 1993, however, it made it possible for parents to both provide funds to support their special-needs child and retain the child's eligibility for federal, state and private charitable benefit programs.
The Omnibus Reconciliation Act of 1993 excluded from benefit program requirements the legacy left to special-needs children in a Supplemental Needs Trust.
How the Supplemental Needs Trust Works
Setting up a Supplemental Needs Trust is a straightforward process.
Working with your estate planning attorney, you appoint Trustees for your child's Supplemental Needs Trust. The Trustees will oversee your child's well-being and manage the estate you leave behind for your child's benefit.
Unlike the guardian and conservator a probate court might appoint, these Trustees are people you know and trust. Relatives or close family friends can be appointed to supervise your child's personal care.
To work with financial institutions and manage the estate, you may also want to appoint as Trustees your trusted financial advisors.
As part of setting up your child's Supplemental Needs Trust, you will provide detailed written instructions to direct your Trustees' activities.
By law, Trustees must follow your instructions to the letter. So you can rest assured they are attending to your child's education, housing, and other needs as you would wish.
Best of all, the Supplemental Needs Trust will preserve your child's eligibility for federal, state and charitable benefit programs.
The only requirement is that the funds withdrawn from the Special Needs Trust must be for purposes other than those covered under the governmental and private benefit programs.
Buyer Beware: Estate Planning Short-Cuts that Can Derail Your Goals
While acknowledging the need for estate planning for their children, some parents take short-cuts that create as many problems as they solve.
One of the biggest mistakes parents make -- and it happens with alarming frequency -- is naming their children as beneficiaries of their insurance policies, qualified pension plans, stocks, and other financial instruments.
Unfortunately for these parents and their children, neither the financial institutions or the probate courts will hand that money over to minor children. Instead, the money will be turned over to a conservator who will hold the money in trust for the child.
If you haven't appointed a guardian or conservator, the probate court will do so for you, and once again, you'll have little guarantee that those in charge of your child will be the people you would have selected.
Secondly, some parents believe that an ordinary income trust will preserve their legacy for their special needs child without interfering with his eligibility for entitlement programs. While laws change constantly, as of this writing, only the Supplemental Needs Trust can secure for your child the financial security you desire.
Planning for the Unthinkable
As difficult a subject as it might be, all parents owe it to their children to ensure that they're well cared for, come what may. Parents of special-needs children face an even greater imperative to do this essential planning.
Proper planning for the special child can allow the child to remain eligible for public assistance through the Medicaid and SSI programs without having to spend down his or her inheritance, provided such inheritance is left in a specially designed trust for the benefit of the child.
Timing of Planning is Crucial
In order to protect a disabled beneficiary's entitlements, it is crucial that planning be completed BEFORE the beneficiary receives or becomes entitled to the family resources or litigation proceeds which are meant to benefit the disabled child. This means that the proper estate planning documents must be created before the disabled child becomes entitled to receive them. A properly drafted trust is the key document to protect a disabled child.
In the context of proceeds of a settlement of a lawsuit, it means that proper settlement documents are drafted which include that the settlement proceeds to be paid to the child, (or parent on behalf of a disabled child), be paid, instead, to a properly drafted trust.
In this way, regardless of the size of the settlement, the child will not lose, medicaid, SSI or any other state or federal subsidy to which he/she is entitled as a result of the disability.
Entitlement Protection Requires a Knowledgeable Attorney
As an attorney who concentrates on estate planning, I've helped countless families deal with emotionally difficult issue. And planning for the care of minor children or the special-needs child certainly tops the list of emotionally-charged topics.
But whenever a family tackles these tough issues, I've seen one common reaction demonstrated over and over again: the peace of mind parents gain from a well-designed estate plan more than compensates them for having to plan for the unthinkable.
Just as one carefully chooses the litigation attorney to represent one or one's child in the event of catastrophic injury, the choice of a planning attorney to protect those proceeds, or inheritance, is just as crucial.
Even if you have existing counsel handling litigation, a separate estate planning counsel is best utilized to protect the proceeds of settlement or to preserve family assets for the protection of a child who most dearly needs the benefit of inheritance and the entitlements which the law provides.
This summary of the Supplemental Needs Trust for the special child was prepared by Joseph R. Burcke and is intended to give some general information about trusts, and not specific legal advice. For more information on Supplemental Needs Trusts, consult with an estate planning professional.
Mr. Burcke's law practice is limited to Estate Planning and administration. He conducts free seminars in the St. Louis Metro Area on estate planning and offers a free consultation to anyone seriously interested in protecting their family through proper estate planning. For a current schedule of seminars, call 314-527-3056.