While all estate planning is important, and generally at Scott Bloom Law we handle cases involving the elderly, it takes on greater significance when you have a child with special needs. Having helped families before in creating estate plans for children with special needs, we recognize the pain points involved. Some of the difficulties of estate planning for children with special needs is not knowing what type of care they will need, or what type of government benefits they will be eligible for when they turn 18. Children with disabilities have increased financial and care needs, so ensuring their long-term welfare can be tricky. Proper planning by parents is necessary to benefit the child with special needs, including an adult child, as well as assist any siblings who may be left with the caretaking responsibility. If you have a child with special needs, it is important to review your planning options with your attorney and discuss your child’s health, capabilities, and prognosis. Then you can tailor a plan that is right for your child, allowing for as much flexibility as possible. Below are some tips on creating an Estate Plan that benefits children with special needs.
Special Needs Trusts
The best and most comprehensive option to protect a loved one is to set up a special needs trust (also called a supplemental needs trust). These trusts allow beneficiaries to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). The goal of this trust is to supplement but not supplant the government benefits that the child will receive. The trust must be drafted so that the child does not become ineligible for the government benefits. There are three main types of special needs trusts:
- A first-party trust is designed to hold a beneficiary’s own assets. While the beneficiary is living, the funds in the trust are used for the beneficiary’s benefit, and when the beneficiary dies, any assets remaining in the trust are used to reimburse the government for the cost of medical care. These trusts are especially useful for beneficiaries who are receiving Medicaid, SSI, or other needs-based benefits and come into large amounts of money because the trust allows the beneficiaries to retain their benefits while still being able to use their own funds when necessary.
- The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect a beneficiary’s access to benefits and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. But a third-party special needs trust does not contain the “payback” provision found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in the trust can pass to other family members, or to charity, without having to be used to reimburse the government.
- A pooled trust is an alternative to the first-party special needs trust. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources with those of other trust beneficiaries for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in the account reimburse the government for care, but a portion also goes towards the non-profit organization responsible for managing the trust.
Not everyone has a large chunk of money that can be left to a special needs trust, so life insurance can be an essential tool. If you’ve established a special needs trust, a life insurance policy can pay directly into it, and it does not have to go through probate or be subject to estate tax. Be sure to review the beneficiary designation to make sure it names the trust, not the child. You should make sure you have enough insurance to pay for your child’s care long after you are gone. Without proper funding, the burden of care may fall on siblings or other family members. Using a life insurance policy will also guarantee future funding for the trust while keeping the parents’ estate intact for other family members. When looking for life insurance, consider a second-to-die policy. This type of policy only pays out after the second parent dies, and it has the benefit of lower premiums than regular life insurance policies.
At Scott Bloom Law, we are a team of advocates who care, always fighting for what’s best for our clients and their families. Visit us at scottbloomlaw.com or call 215-364-1111, to talk to find out more.