Special Trusts For Disabled Children

October 28, 2002
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NEW YORK — Parents or grandparents who want to plan ahead for the continuing care of their disabled child or grandchild may want to investigate use of a special needs trust.

The purpose of special needs planning is to provide trust assets for future supplemental needs while maintaining the child’s eligibility for government programs to cover long-term primary care. 

The whole point of the special needs trust is to make sure that parents or grandparents don’t make payments to or on behalf of the child that would interfere with, or cause the loss of, government eligibility. 

Assets left directly to a disabled child may not only jeopardize the child’s eligibility for government benefits, but also may become subject to reimbursement rules, with the government demanding repayment for benefits paid in the past, said Chris Annalora, marketing consultant with TIAA-CREF, a New York-based financial services organization.

Special needs trusts are designed to hold, manage and distribute assets for the disabled child, and they limit how trust assets may be used so as not to disqualify the child from any government benefits.

“It limits the payout from the trust so any sort of payment, or picking up of expense, for anything that would mess up the child’s eligibility is forbidden by terms of the trust,” Annalora said.

The special needs trust allows parents or grandparents to leave assets to cover supplemental needs, which could include enhanced medical care, rehabilitative therapy, travel, vacations, educational opportunities — or any other “extra” that government programs don’t provide for, he explained.

A problem that often occurs is that parents do the special needs estate planning but neglect to talk to the grandparents about it.

“The grandparents will think they’re doing the child a favor and just leave a legacy outright, which will mess up all the planning the parents did,” Annalora said.

“So it is important that both the parents and grandparents understand that the money should not be left with the child directly.”

Annalora said many people with disabled children aren’t aware of special needs trusts, but such trusts are fairly well known among estate planning lawyers, especially among elder care lawyers. They typically know a lot about government programs, so they’re often the ones involved in the setup of special needs trusts.

Disabled children usually qualify for a number of state and federal programs, all of which have eligibility requirements. 

Three of the better-known benefit programs are Supplemental Security Income (SSI), Medicaid and Social Security, which are federally mandated but state-administered.

Like SSI, some programs are based on need and provide benefits that vary with a family’s income and assets.

If a family makes too much money by program standards, the child fails eligibility requirements and loses the benefit. In some cases, the family may be required to repay government funds received in the past for the child.

Parents of disabled children tend to be “incredibly sophisticated” as a group because they’ve had to advocate for their children from birth, and most have done a great job of tapping into government programs themselves, he noted.

There are two aspects of special needs planning: one is purely financial and the other psychological.

“One of the big issues is if you have a child with a disability who is going to need additional care after the parents are dead — because it’s a child that’s going to grow and live to maturity and beyond — there’s the psychological issue of who is going to be there when the parents are gone,” Annalora explained.

A lot of families end up with the difficult situation of trying to balance how much other siblings are going to assist in the disabled child’s long-term care. In some families siblings assume that responsibility and in others they do not.

It puts the parents in sort of a catch-22 because they would like the siblings to be responsible adults and care for their disabled brother or sister, he said, but at the same time they don’t want to put such a burden on siblings that it crimps those siblings’ personal lives.

Special needs planning involves parents sitting down with an estate planner and figuring out what kind of future they want for their disabled child and what quality and level of ongoing “extra” care they’re able to provide. 

By drafting a special needs trust, along with other documents, they leave behind a road map for the child’s future and try to insure there won’t be any big gaps in coverage, Annalora said. 

Special needs trust documents tend to include a lot of backup clauses to guard against potential changes in government programs.  

“It’s tough because you’re relying on governmental programs to take care of things — and governmental programs change.

“Special needs trusts often have a lot of language in them hoping to stay flexible for the future, so if governmental programs change, the trustee is allowed to adapt the trust assets to pick up needs and that sort of thing.”

Families can use any kind of asset to fund a special needs trust. Many fund it with life insurance.

A parent, for instance, can purchase an insurance policy on his own life designating the proceeds to be paid to the trust. Likewise, a parent with an existing insurance policy can change the beneficiary so that some or all of the proceeds are paid to the trust.

It is critical in either case to set up the trust as the beneficiary, especially if the child still is a minor. The problem in this connection is that in most states, an insurance company cannot pay life insurance proceeds to a beneficiary under age 21.

How exactly a family sets up the special needs trust depends on other estate planning issues in the family, Annalora observed.

“But life insurance has become a very common asset simply because a lot of people don’t have enough money that they’re comfortable they’re going to be able to take care of the child for the rest of his or her life.

“I think that however you’re doing this, whatever the family’s other estate planning needs, do it now. You may choose to buy life insurance or look at other funding mechanisms later, but it’s one of those things you should have right away, just in case.” 

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