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  • Kevin Cleveland

Estate Planning for Special Needs

A sound, up-to-date estate plan is important for virtually every adult, but it is absolutely essential if you have loved ones with special needs. Chances are, there is or will be someone in your family who will need long-term help managing finances and/or personal care. Many individuals with special needs will be financially dependent on others for their entire lives. That could be as long as 70 years for a child whose life expectancy is not affected by the condition creating the need for special care. Whether for a child, a sibling, or other loved one, it is critical to have a plan in place that protects their long-term financial well-being.

So where do you start? First, open the dialogue with appropriate family members to identify what you’re trying to accomplish. Then extend the conversation to professionals such as financial advisors, attorneys, and fiduciaries to figure out how you can reach those goals. Consult with medical professionals if needed to determine what care will be necessary for the special needs individual and how it will be provided. This will help you structure the ultimate distribution of your estate. Does it make sense to leave more money to a special needs beneficiary? Or less because other sources of income will be available, such as Social Security? Or should the inheritance be as equal as possible, especially among your children?

Next, tackle the question of how these funds should be left for the special needs beneficiary. A direct inheritance is typically unwise. Many people with special needs find it difficult to manage money effectively, and an outright gift of assets may inadvertently disqualify the individual from eligibility for certain needs-based government benefits. You may also be tempted to leave extra assets in the hands of another individual to care for the special needs individual. However, this option also has its share of pitfalls, as the individual left “in charge” may face financial challenges (such as loss of job, bankruptcy, divorce, health crisis, etc.) that jeopardize even the best-laid plans.

If your family is among the nearly 30% of American families with at least one member with special needs, consider the following strategies:

1. ABLE Accounts. Congress passed the Achieving a Better Life Experience Act in late 2014, creating a tax-advantaged account for people with disabilities. ABLE accounts work similarly to a 529 account for education; both are administered at the state level with varying plans (and fees) per state. ABLE account funds grow and can be spent tax-free on qualified expenses such as medical treatment, transportation, housing, education and assistive technology. To qualify, the beneficiary of the ABLE account must meet certain criteria evidencing a severe disability; perhaps most importantly, the individual must have become blind or disabled before age 26.

2. Special Needs Trust. You can set aside funds in a SNT to specifically provide for the care of an individual with special needs. Trusts set up specifically for special needs dependents can help ensure that those funds do not jeopardize eligibility for needs-based benefits at the federal, state, and/or local level. By their nature, SNTs limit how the trust funds can be used. If eligibility for government benefits is not an issue, you may opt for a general discretionary trust which allows for greater flexibility and imposes fewer limits on disbursements.

Not all SNTs are created equal. “First-Party” SNTs may be created by the special needs dependent who comes into money via an inheritance, a lawsuit, or other unexpected means so that the “windfall” does not disqualify the dependent from government benefits.  However, any funds remaining in First-Party SNTs are subject to recovery by Medi-Cal after the beneficiary’s death if he or she received benefits during his or her lifetime. 

You can establish a “Third-Party” SNT for a special needs dependent during your lifetime or upon your death through a will or trust. The trustee has discretion to pay for necessities and services not covered by the beneficiary’s own resources and government benefits without jeopardizing such benefits, as long as disbursements are not made directly to the beneficiary. When the beneficiary dies, any remaining SNT assets can be distributed according to your wishes.

Lastly, you can join a “Pooled” SNT to set aside money for a special needs dependent. These trusts are set up and run by nonprofit organizations who combine and invest the participants’ assets together and distribute funds to the disabled beneficiaries in proportion to their share of the total amount. The pros and cons of a pooled SNT should be weighed carefully by each family, as the advantages of joining an established trust may be outweighed by the difficulty in moving assets out of such trusts, even if the trustee is not doing a good job in managing the trust assets. Once the beneficiary dies, any remaining funds will permanently remain in the Pooled SNT to help the other special needs beneficiaries.

No matter which option(s) you choose for your loved one with special needs, remember to review your plan every 3 – 5 years (or whenever you have a major life change) with your estate planning attorney and update it as needed. Then you can be confident that your loved ones will be cared for even when you are no longer here to look after them yourself. Contact us at CohenDurrett LLP to get started on a customized plan or update on existing plan.

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