Special Needs Planning

One of the greatest concerns of parents who have a child with special needs is who will take care of their child if the parent dies or becomes incapacitated.  All of the normal estate planning challenges of parenthood – deciding on a suitable guardian, providing financial resources, and ensuring the child’s emotional well-being – are magnified when a child has a physical, emotional, or cognitive disability.  Moreover, a child with special needs may continue to be dependent on a parent or other family member long into adulthood. 

Fortunately, there are actions you can take to help ensure that your child is taken care of in the event something happens to you.  Careful financial and estate planning should be undertaken so that a comprehensive plan is in place to provide a comfortable lifestyle for a child who may not be able to take care of themselves.

While everyone should implement basic estate planning documents, these documents are particularly important when you care for someone with special needs.  In addition to the basic documents, you should also talk to your attorney about setting up a special needs trust.

Special needs trusts are an important legal tool used to provide financial resources for a person with a disability without affecting the beneficiary’s eligibility for government benefits like Medicaid and SSI. There are two types of trusts that fall under the umbrella of “special needs trusts”:  trusts that are used for estate planning purposes (also referred to as a third party special needs trust or a supplemental needs trusts) and trusts that are used for assets that are already owned by the person with a disability (often referred to as first-party trusts).

A third party special needs trust is primarily used to leave an inheritance to a loved one with a disability.  If your child is receiving Medicaid or SSI at the time they receive an inheritance, the inherited assets are likely to exceed the asset limitation for these benefits, rendering them ineligible for services they were previously receiving.  The inheritance will simply be used to provide the services that were lost and have a negligible effect on the beneficiary’s overall quality of life.

By leaving an inheritance in a third-party special needs trust, the assets can be used for the benefit of your child in a way that preserves their eligibility for government benefits.  The trust assets could be used to pay for only those resources that are not already provided by the government, such as transportation, rehabilitation, home health aides, education, and entertainment.  The trust document would specify a trustee of your choice who would be responsible for making the appropriate distributions.  Leaving assets in a trust has other benefits as well, such as protecting the assets from existing or potential creditors.  When the primary beneficiary of the trust dies, the assets can be transferred to another beneficiary, such as a sibling or niece.

On the other hand, a first-party special needs trust is used when assets have already been transferred to the person with a disability.  This may occur if the person receives an inheritance directly (i.e., not in a trust) or if they receive a settlement as a result of a personal injury lawsuit.  In these situations, the assets can be transferred to a special needs trust that preserves the person’s public benefits while allowing the assets to be used for goods or services not provided by the government.  When the beneficiary dies, the government can recover from the trust the cost of services that were provided to the primary beneficiary.  Anything left over can be transferred to other heirs.

While similar, a third-party special needs trust is preferable to a first-party special needs trust, because the government has no residual claim to the trust assets.  A first-party special needs trust also may require court approval and may be subject to stricter scrutiny by the state public benefits agency.  For this reason, any parent who has a child with special needs should have in place an estate plan that includes a third-party special needs trust.

While we wish we could always be there to take care of our loved ones, we never know what the future holds.  Fortunately, we can take actions that will make it easier on those we leave behind.  By implementing a comprehensive estate plan, you can take comfort in knowing you did everything you could to make sure your loved one with special needs will be taken care of when you’re no longer around.