We all want to provide for our children, and perhaps even
leave a little something behind to help lighten their load after we're
gone. But when you're the parent of a disabled child who may outlive
you, the importance—and complexity—of putting financial safeguards in
place takes on new meaning.
Indeed, the manner in which you distribute assets
to a special needs beneficiary after you die not only impacts his or her
eligibility for government benefits but also their quality of life
going forward.
"Being well-intentioned is not enough," said Michael Duckworth, a
Merrill Lynch financial advisor who specializes in estate planning for
clients with a disabled loved one. "There are a lot of stories of
grandparents who accidentally knocked their grandchild out of a
needs-based program by leaving money to him or her outright."
How so?
Children and adults with significant disabilities,
either physical or mental, are eligible for essential long-term nursing
care under Medicaid, along with cash assistance under Supplemental
Social Income—but only if they own no more than $2,000 in countable
assets or $3,000 for a married applicant—and a number of state programs,
including special education classes and vocational training.
"You may have a situation whereby Grandma writes a check out in her
disabled grandson's name and he gets kicked out of the program that was
giving him a better life experience," Duckworth said. To get back in,
the beneficiary would have to spend down his assets and reapply for the
program, which causes a lapse in service and disrupts continuity of
care.
Unbeknownst to many, said Duckworth, many of the
best state programs—including vocational training and those designed to
service individuals with specific diagnoses, such as autism—are
available only through Medicaid.
Supplement their needs
"No matter how much wealth you may have, there isn't a system whereby you can write a check and get in," he said.
Enter the special needs trust.
Such trusts, also called supplemental needs
trusts, are designed to enable third-party individuals, generally family
members, to leave an inheritance to disabled heirs without those assets
counting against them for the purpose of securing public benefits.
Because assets are titled to the trust, they are not considered part of the estate.
There is no limit to how much you may contribute.
Elizabeth Roberts, senior vice president and chief
fiduciary officer at Bryn Mawr Trust, said the language in such trusts
should clearly indicate that distributions are to be made exclusively
for supplemental expenses, or services not covered under Medicaid, such
as medical and dental expenses, recreational therapy, specialist visits,
dietary supplements, transportation, travel expenses and prosthetic
devices.
"Frequently, the trust specifically states that funds are intended to supplement and not supplant," she said.
For maximum protection, the language within should
also note that distributions are to be made only after other assets and
governmental programs are considered, Roberts said.
Special needs trusts can be used to receive proceeds from
litigation or a personal injury settlement on behalf of the disabled
beneficiary, as well, in which case it would be structured as a "first
person" or self-titled trust.
Money held in a self-titled trust is similarly
excluded from public benefit calculations during the beneficiary's
lifetime, but there is a payback provision.
Any assets remaining in the trust when the beneficiary dies would
be used to pay back Medicaid for expenses incurred by the state in
administering care. In the event that excess money remains after the
debt is repaid, those assets would pass to a designated heir. If there's
not enough in the trust to make Medicaid whole, that debt dies with the
special needs beneficiary.
Supplemental needs trusts that are set up by a
third party have no such payback provision, and thus, any assets
remaining in the trust after the beneficiary dies can be distributed to
subsequent heirs free and clear.
Insure against claims
Special needs trusts serve another important purpose, too,
according to Minerva Vazquez, an attorney with Miami law firm Frye
& Vazquez, who specializes in the area of special needs estate
planning.
They protect the assets held within from creditors and claims against the estate.
"A lot of parents think it's OK to leave money to
their other, non-disabled child who has agreed to care for their
sibling, but they don't consider the possibility of a lawsuit or divorce
settlement," Vazquez said.
If the non-disabled child gets sued, files for
bankruptcy, causes a car accident or gets divorced, she said, those
assets are vulnerable.
"Under a trust, that money is protected from creditors and settlements," Vazquez said.
"Everyone loves their child or grandchild, and the last thing they want is to do something that takes them out of a program they love and really benefits them."
Indeed, mistakes are common when dealing with the unique
estate-planning needs of the disabled, said Duckworth at Merrill Lynch.
Some families, for example, create traditional
life insurance trusts in the name of a disabled loved one but fail to
stipulate that the proceeds should be directed to a special needs trust
when it pays out. There again, the beneficiary would be bumped out of
Medicaid as a result.
"If you buy an insurance policy, you need to leave
that money to the special needs trust," said Duckworth, noting that a
regular trust will not suffice. "Traditional estate planning is not the
approach when you have a beneficiary with a meaningful disability."
Because the consequences of estate-planning missteps are so dire for
disabled beneficiaries, Duckworth suggests all immediate and extended
family members (parents, siblings, aunts, uncles and grandparents) who
may be inclined to generosity be advised to enlist the help of a
professional experienced in special needs estate planning, be it a
lawyer or financial advisor.
"Individuals with special family members need to be
present to the risks that are there," Duckworth said. "Everyone loves
their child or grandchild, and the last thing they want is to do
something that takes them out of a program they love and really benefits
them."
Source: CNBC
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