Parents of a child with special needs often face many challenges as they care for and raise their child. One challenge many parents face is how to assure that their child will be cared for and have the financial support the child needs after the parents’ deaths or incapacitation.
Estate planning for parents is a crucial step in providing for the future care of a special needs child, especially if parents want to avoid risking their child’s benefits. A child receiving public assistance or disability benefits could lose those benefits if they inherit large sums of money or property. With careful estate planning, parents can provide for the financial needs of their child while keeping their benefits intact.
Five Estate Planning Tools Parents of a Special Needs Child May Want to Consider
1. A Special Needs Trust
One of the common estate planning tools used by parents of children with special needs is a Special Needs Trust (SNT) or Supplemental Needs Trust. An SNT has standard rules about the use of the funds in the trust; however, the trust is typically easy to set up and manage. You also have several options for funding a Special Needs Trust.
The purpose of an SNT is to supplement any benefits the child might receive from government programs. A correctly drafted and funded Special Needs Trust does not impact eligibility for government disability programs, including Medicaid, Medicare, Social Security Disability Insurance (SSDI), and Supplemental Security Income (SSI).
Reasons parents may choose a Special Needs Trust for their child include:
· Preserve eligibility for public benefits;
· Pay expenses not covered by public assistance and disability benefits;
· Protection of assets from creditors;
· Name a trustee who continues to manage the trust and pay the child’s living expenses after the parents’ deaths;
· Protect the inheritance of a child with special needs;
· Ensure assets designated for a child are used to benefit the child;
· Protect assets for the child during a divorce;
· Allow other family members and friends to contribute funds to the trust; and,
· Provide for your child during your lifetime, if you become incapacitated, and after your death.
A parent may fund a Special Needs Trust in one of three ways.
First Party Special Needs Trust
Also known as a self-settled trust, assets that belong to the child fund a First Party SNT. When a child receives a personal injury settlement or an inheritance from another family member, an SNT holds the funds to benefit the child. If the child receives the money directly, the child could lose eligibility status for public assistance and disability benefits.
A First Party SNT is established by the court, a parent, the child’s legal guardian, or a grandparent. The individual benefiting from the trust must meet the Social Security Administration (SSA) definition of disabled and be under the age of 65 years.
Upon the child’s death, any remaining funds in the SNT must repay Medicaid for any expenses the agency pays on behalf of the child. However, the Medicaid payback requirement only applies to the funds in the SNT as of the date of the child’s death. Therefore, the maximum amount Medicaid can obtain is the value of the SNT. A First Party SNT is an irrevocable trust, meaning once it is executed and funded, the trust may not be revoked.
Third Party Special Needs Trust
Anyone other than the person with special needs can contribute to or fund a Third Party SNT. Usually parents, grandparents, and other family members contribute the money to fund the trust agreement. A Third Party SNT has several advantages. Parents can ensure their child with special needs will have the funds he or she needs after the parents’ deaths. This type of Special Needs Trust also allows other family members and friends to contribute to the needs and care of the child without jeopardizing the child’s disability benefits or public assistance.
Another advantage of a Third Party SNT is that the trust may be created as a revocable trust so it can be changed or modified if necessary. Also, a Third Party Special Needs Trust is not subject to the Medicaid payback provision.
Pooled Trusts for Children with Special Needs
Pooled trusts also use the child’s assets to fund the trust, but a nonprofit organization manages the trust. When a child has a small amount of money that cannot justify creating a First Person Special Needs Trust, but the money could cause losing government benefits and disability benefits, a parent may want to transfer the funds to a pooled trust.
The money is held in trust with funds from other individuals and managed by the nonprofit organization. A sub-account within the pooled trust holds the child’s funds to benefit the child.
2. An ABLE Account
The Achieving a Better Life Experience (ABLE) Act of 2014 created savings accounts for individuals with special needs or disabilities. These savings accounts can pay living expenses and other costs for a person with a disability. Like a Special Needs Trust, an ABLE account protects a person’s eligibility for public assistance and disability benefits. However, ABLE accounts are subject to Medicaid payback provisions based on individual state laws.
A person with a disability can own an ABLE account and remain eligible to receive benefits from programs that limit eligibility based on income and assets, such as Medicaid, SSI, and SNAP. For an adult child with special needs, an ABLE account allows the person to have access to money for living expenses instead of remaining very poor to continue receiving government assistance. For parents, establishing an ABLE account can help pay for the significant costs associated with raising a child with special needs.
Individuals must meet certain requirements to be eligible to open an ABLE account. Requirements for an ABLE account include:
The diagnosis of the disability or impairment must occur before the individual reaches the age of 26 years; and,
The individual is receiving disability benefits under SSI or SSDI.
If a child meets the age requirement but is not receiving disability benefits under SSI or SSDI, the child may qualify for an ABLE account if the child’s condition meets or exceeds the Social Security Administration’s definition of disabled and the disability meets or exceeds the criteria for a significant functional limitation. A licensed physician must provide a letter of certification.
An ABLE account provides certain advantages for an individual with special needs and parents of a child with a disability. ABLE accounts are easier to set up and manage compared to Special Needs Trusts. The family and the individual retain control over the funds instead of a trustee.
It is typically easier for family members and friends to contribute to an ABLE account. Parents can accept gifts directly from individuals. They may also create a gifting page online which can contribute to an ABLE account. Current gift tax exclusion laws allow individuals to contribute up to $15,000 annually to another person’s ABLE account without reporting the gift to the IRS. Individual state laws set lifetime limits on contributions to ABLE accounts.
The expenses paid with the funds in an ABLE account include housing and other “qualified disability expenses” that the funds in a Special Needs Trust cannot be used to pay. Therefore, an ABLE account may be a better option for some families compared to a Special Needs Trust. However, many families establish an ABLE account besides a Special Needs Trust to provide maximum benefits for their child with special needs, especially since the contributions to an ABLE account are limited. Parents should check with their state to determine any special rules or regulations governing ABLE programs in their state.
3. Long-Term Care Insurance for Parents
Parents need to engage in estate planning for their future needs and the future needs of their child with special needs. As parents age, healthcare costs for the parents may increase, and the parents may require assisted living services. A parent’s diminished capacity could cause expensive home health care or nursing home care for the parents. This care could deplete retirement savings and other assets that would normally be inherited by the special needs child to provide for his or her care after a parent’s death.
Long-term care insurance for parents does not risk a child’s benefits, but it can ensure that the child’s inheritance remains intact even though a parent may require personal care or nursing home care. Some financial experts argue against long-term care insurance because of the price. Parents who decide that they may want to purchase long-term care insurance as part of their estate plan should research plans and prices before their fiftieth birthday when premiums may be lower, and it is easier to pass medical underwriting requirements.
4. Survivorship Life Insurance Policies
Parents may also want to consider a survivorship life insurance policy as an additional way to provide for a child with special needs after the parents’ deaths. Also known as a Second-to-Die policy, a survivorship life insurance policy only pays out after the death of both insured parties. The proceeds from the policy can be paid directly to a Special Needs Trust to benefit the child.
Often, the premiums for a survivorship life insurance policy are less expensive than the premiums for two single policies. It may also be easier to qualify for a survivorship life insurance policy because the policies are less risky for the insurance company since it only pays out after the second insured party dies.
It is crucial to have a valid will in place to avoid an estate being subject to intestate laws. If a parent dies without a will, state intestate laws determine the distribution of property to heirs. Under state law, a surviving spouse may inherit all or most of the estate. However, under the intestate laws in many states, a portion of the estate is distributed to surviving children, even if there is a surviving spouse.
If a child with special needs receives a large inheritance because a parent did not have a will, that inheritance could jeopardize the child’s disability benefits and public assistance. SSI, Medicaid, and the SNAP program have strict limitations on assets and resources. A child who inherits a portion of his or her parent’s estate could lose these vital benefits. To avoid intestate distributions to a child with special needs, parents should execute a will.
It is prudent to consult an estate planning attorney before executing a will. DIY wills or templates of wills found online do not have the specific legal language and special provisions necessary to protect a child with a disability or special needs. Executing a will that does not include all provisions for transferring a child’s inheritance into a Special Needs Trust or ABLE account could cause the child losing his or her disability benefits and government aid.
Planning Now for Your Future and the Future of Your Child
Government assistance and disability benefits do not cover all expenses for an individual with special needs. Parents and families cover the remaining costs for a special needs child. Without assistance from parents, a child with a disability may go without essential needs. With careful planning, parents can better assure that their child will have access to sufficient funds to pay for his or her living expenses, personal care, and needs after the parents’ deaths.
Through careful estate planning, parents can protect income and assets for a child with special needs. Parents can also involve other family members and appoint trustees to ensure that their child continues to receive the financial support and care he or she needs for the remainder of his or her life, even if the parents are not capable of providing the support because of their death or incapacitation.
Contact Thienel Law today to schedule a time to discuss your special needs estate planning options. Maryland estate-planning lawyer Steve Thienel is dedicated to assisting clients in Maryland, Virginia, and throughout the DC Metro area.