We should all be aware of the importance of getting our financial and legal affairs in order. But for parents of children with disabilities, the importance of planning is even more essential. Myriad issues face the parents of children with special needs. Perhaps one of the biggest concerns is how to provide for their child when the parents are no longer around. But while there is no replacement for the care and love of a parent, some planning methods are better than others.
A case study
John and Sally have three adult children: Charlie, Emily, and Sam. Charlie and Emily are independent and doing well. Sam, 37, has a developmental disability and is living with John and Sally. Caring for Sam is very important to John and Sally. They understand that Sam will never be able to support himself independently. He will need a home, income, and a support system for the rest of his life.
Without appropriate estate planning, Sam will inherit from his parents but since Sam will not be able to manage financial assets, this would most likely require the court appointment of a guardian. Such a guardian would have to request distributions to be made for the benefit of Sam and account to the court each year. In addition, the assets that Sam receives may preclude him from obtaining certain types of government assistance without the assets being spent down on the cost of his care. The area of governmental benefit programs is complex, as Sam may be entitled to one or more programs and the requirements are different for each.
Based on all this, John and Sally are considering estate planning, and they are thinking of leaving all their assets to Charlie and Emily since they have promised to take care of Sam.
Is this a good solution? Actually, it has serious problems. No assets are legally protected for Sam, and he may live a long time. Charlie and Emily may not live up to their commitment. This could happen with the best of intentions should Charlie or Emily have financial problems, become disabled, get divorced, or die.
A better solution might be the creation of a third-party special needs trust (also known as a supplemental needs trust, or SNT) for Sam. This trust can be created as a standalone trust while John and Sally are alive, or it can be created as part of John and Sally's testamentary distribution plan when both of them die. A plan with such a trust does not rely on the commitment of others in order to be successful. The third-party special needs trust (SNT) means that the assets used to fund the trust do not belong to Sam; they are assets of a third party. In this case, the assets used to fund the trust may be John and Sally's. In many cases, parents such as John and Sally do not have sufficient assets to meet their child's needs after they are gone. One of the best ways to address this concern is with life insurance. By purchasing life insurance, the parents can create a pool of money to fund the SNT, which will ensure the highest quality of life for the child with special needs.
The SNT would be designed to hold Sam's inheritance. It needs to be carefully drafted so that the assets in the trust can be used to enhance Sam's lifestyle but not cause him to lose his needs-based benefits. For example, the state Medicaid system may pay very little in the way of dental care; however, the funds in the SNT can be used to pay for that. Also, the funds in the SNT can be used to allow Sam to participate in some activities that would provide him with a great quality of life. Neither of these distributions will reduce Sam's needs-based benefits.
The standalone SNT is an especially good idea if there are other family members or friends who want to gift or bequeath assets for Sam's benefit. They can be provided with the information on how to transfer assets to the standalone SNT. This type of SNT can be created by anyone for anyone else. Grandparents can set up an SNT for grandchildren. A sibling can set up an SNT for another sibling. A child can set up an SNT for a parent. And a friend can create an SNT for another friend.
Of course, there is no one solution that works for each and every family situation. However, it is important to remember that in creating an SNT, you must make sure that it conforms to the applicable laws while maintaining maximum flexibility to improve the quality of life of the child with special needs.
Bernard A. Krooks, J.D., CPA, LL.M (in taxation), CELA is a founding partner of the law firm Littman Krooks LLP with offices in New York City and White Plains, NY. He can be reached at 212-490-2020 or 914-684-2100. For more information, visit www.littmankrooks.com.
