|By Shannon King Nash, Esq.
Jane and Mark Ramsey are an average family1. They have two kids – Jennifer age 12 and Jimmy age 3. Their assets include a house valued at $200,000 (but with no equity), two cars together worth $15,000 and a $100,000 life insurance policy. Jane and Mark have a combined gross income of $100,000. They also have 401k plans and stock worth $35,000. Recently, they learned that Jimmy has autism. Since they aren’t rich, they don’t think they need sophisticated estate planning vehicles like special needs trusts, right?
The Ramey’s need to think again. Every parent of a developmentally challenged child needs to invest in careful planning to protect their child’s future. The less the family has, the more tragic are the consequences of a failure to plan.
What’s the Big Deal?
Supplemental Security Income (SSI) is the federal needs-based program that many disabled children and adults may be eligible for if they meet certain income limits. SSI beneficiaries may also get Medicaid (medical assistance) to pay for hospital stays, doctor bills, prescription drugs, and other health costs. However, once a person’s income exceeds $2,000 a year, they are no longer eligible for SSI or Medicaid.
Over $13 billion is spent annually to care for individuals with autism. For the average affected family this translates into $30,000 per year. Many parents believe that needs-based programs like SSI and Medicaid will take care of their child when they are gone. This is a common misconception.
Take our family the Ramseys. Jimmy’s inheritance will have to be completely spent before he’s eligible for the needs-based programs. With Jimmy’s half of his parent’s estate (about $75,000), he will be forced to spend all but $2,000 of his inheritance before he becomes eligible for a single dollar of assistance. And he may be forced to spend most of this on health care expenses. At this rate, Jimmy will have exhausted his inheritance in less than three years. So much for the nest egg that the Ramsey’s had hoped to leave.
Even families who believe their child won’t need government assistance (for example, a family with a million dollars in assets) this could still be a problem. Their child will probably not be able to qualify for private health insurance after the parents are gone and perhaps before depending on their employer’s health insurance policy. Medicaid might be the only way for their child to get needed health care services. But this child will not qualify for Medicaid because of his huge inheritance. With people living longer and the costs for care of autistic people increasing, this huge inheritance will likely be completely spent long before the parents had hoped – leaving the child to spend his later days in poverty.
1The Ramsey’s are a fictional couple and are being used to illustrate some of the points in estate planning for special needs children.
The Money Issue
Although there is no bright line rule for when a parent needs a special needs trust, many families should have one. Special needs trusts are probably not necessary for parents living at the poverty level, which was $18,100 for a family of four in 2002. These families are already on government assistance and the kids will continue on this assistance even after their parents’ death.
But for the majority of American families – those earning about $65,000 a year for a family of four – a special needs trust is crucial. These families typically have very little in tangible assets, second mortgages on their homes, and little to no savings (likely due to paying for costly therapies). But even though they not wealthy, their children aren’t used to relying on government assistance. And they often have life insurance (mostly term life insurance or employer provided), which may be valuable. Estate planning vehicles like special needs trusts can ensure that this life insurance will in fact be available to retain their child’s quality of life.
Special Needs Trust
A special needs trust is a vehicle that provides assets from which a disabled child can maintain his quality of life, while still remaining eligible for needs-based programs that will cover basic health and living expenses. Here’s how it works: the Ramsey’s create a special needs trust to benefit Jimmy that provides instructions as to the level of care they want for him. They also create a will that leaves certain assets to the special needs trust – no assets are left directly to Jimmy. After they are gone, the people they have chosen to manage the trust (trustees) can spend money on certain defined expenses for Jimmy’s benefit without compromising his eligibility for needs-based programs.
In general, basic living expenses such as food and shelter may not be provided for through the special needs trust. But essential quality of life expenses such as clothing, vocational training, facilitative technologies and travel (both around town and long distance) may be provided. Certain health care expenses that are related to the person’s disability (occupational therapy, speech therapy, etc) may also be provided for by the trust. However, more universal health care expenses such as nonprescription vitamins and antibiotics may not be provided. Parameters vary from state to state so parents should check with a qualified attorney in their state. (See Side Bar for questions to ask a prospective attorney and information on how to find an attorney in your area).
Crucial choices you will need to make in establishing a special needs trust include:
The trustee can be a family member or close friend who knows your child and who is organized, financially savvy and above all ethical. Some families opt for a professional trustee (usually working for banks or financial institutions). Whatever the choice, it’s crucial for the trustee to understand the expenses that can and can’t be provided for under the special needs trust.
Purpose of the Trust
This provision should enumerate all of the reasons for establishing the trust and might include the following issues:
Â· Where should the child live? (i.e., a group home vs. assisted living at home)
Â· What specific social activities should be supported by the trust? (e.g. special Olympics, choir, religion)
Â· What specific technologies or treatments should the child have access to?
Â· With whom should the child have regular contact facilitated by the trust? (e.g. plane tickets and other travel arrangements)
Special needs trusts may be completely revocable (altered) at any time. But there are disadvantages to revocability. Revocable trusts can create higher taxes at death since they are included in the parents’ gross estate for purposes of the estate tax. Also revocable trusts can create a problem should circumstances change, like one parent dies and the new spouse wants to change the terms of the special needs trust. One solution might be to make the trust irrevocable when formed such that it cannot be changed. But parents should consider putting an “irrevocability trigger provision” into the revocable trust. Basically, the irrevocability trigger kicks in when the change occurs – such as death of a parent, divorce, or when the trust’s assets reach an amount that is likely to cause a huge estate tax burden.
Others Estate Planning Vehicles
Special needs trusts work best with an integrated estate plan. A will or similar vehicle that directs which funds will go into the special needs trusts is essential. But make sure to understand how the special needs trusts works with the will. A “stand-alone special needs trust” is created during the parents’ lives and can be funded by the parents though provisions in their will. Also other family members like grandparents may make contributions to this trust. However,
if the special needs trust is contained inside the parent’s will, known as a “testamentary trust”, it doesn’t actually exist until the parent dies. In that case, only the parents or those who die after them can fund this trust.
In addition to a trustee who manages the financial aspects under the special needs trust, the parents should also consider appointing a guardian who will manage the day to day care of their child. Although they can be the same person, parents should include as many loving people as possible in caring for their child with autism.
Finally, a letter of intent or a life plan that details the parents’ wishes for their child may be helpful. While these life plans are very useful in keeping the child’s care as close as possible to normal, they are not legal documents. In fact, they do not have to be followed by the child’s new guardian. But because life plans provide very valuable detailed information, they are often used in conjunction with other estate planning vehicles.
Whatever estate planning vehicle(s) is used, it is important to set up something before it is too late. With only a few hours of careful planning, the Ramseys have ensured that Jimmy will be able to maintain his quality of life after they are gone.
The author would like to thank estate planning attorney Diedre Wachbrit, who served as an expert resource for this article.
The following resources provide additional helpful information on special needs trusts.
http://www.ssa.gov/notices/supplemental-security-income — This website has a wealth of information on SSI including an online program called the Benefit Eligibility Screening Tool that determines if your child is eligible for SSI.
http://www.metlife.com – MetLife provides general information on planning for your special needs child including wills and special needs trusts (search special needs trusts on the website’s search engine).
http://www.wachbrit.com – Estate Planning Attorney Diedre Wachbrit provides more detail on the common issues involved with special needs planning and materials used in connection with a parent training seminar on special needs trusts.
http://www.amgtrust.com – American Guaranty & Trust Company has a sample special need trust agreement and sample memorandum on common issues to focus on when drafting a special needs trust.
http://www.specialneedsplanning.com – Special Needs Planning has articles on special needs financial planning and sample letters of intent.
The Association for Retarded Citizens – This organization has articles and an excellent booklet called “The Arc’s Future Planning Resources.” This booklet may be obtained on line at http://thearc.org, by calling 301/565-3842 or writing with $2 postage to The ARC, National Headquarters,1010 Wayne Ave. Suite 650, Silver Spring, MD 20910.
National Information Center for Children and Youth with Disabilities (NICHCY) – This organization has great articles on special needs estate planning and a worksheet for costing out the total expenses of a person with a disability. Visit their website at http://www.nichcy.org. (search their publications for “estate planning” and find their great 20 page guide “Estate Planning ND18”)
http://www.naela.com – National Association of Elder Law Attorneys is a good place to start for a list of attorneys who are knowledgeable with special needs trusts.
http://www.wealthcounsel.com – Wealth Counsel LLC is a consortium of knowledgeable estate planning attorneys with a database that can be searched by state and by typing in special needs.
Choosing a Professional
Many attorneys claim to do special needs trusts when in fact they simply add a sentence or a few provisions to a regular trust – so finding a specialist is key. But an attorney need not break the bank. A special needs trusts may cost between $1,000 – $2,000, with many attorneys offering payment plans. Of course the cost may vary by state and by complexity of the estate plan.
California, Estate Planning Attorney Diedre Wachbrit suggests asking prospective attorneys the following questions:
1. How did you get into this practice area?
Look for a real commitment to helping folks with special needs.
2. How long are your special needs trusts?
Yes, length does matter. A special needs trust averages 40 pages at a minimum.
3. Do you recommend a stand-alone or a testamentary special needs trust?
An attorney knowledgeable in this area will almost always recommend a stand-alone trust because this allows other family members to contribute in their own estate plans directly to the trust. An inexperienced attorney will probably recommend a testamentary trust (a trust that comes into existence when the parents die) because it’s easier for the attorney to draft.
4. Should I disinherit my child?
A knowledgeable attorney should resoundingly tell you no! Some believe that if they disinherit the child and ask a relative or friend to continue the child’s care, the child will be eligible for needs-based programs (SSI and Medicaid) and they have accomplished the same thing as a special needs trust. But the best intentions may still leave the autistic child without a consistent quality of life – especially if the relative or friend has financial difficulties, divorces or even worse, dies.
5. How many special needs trusts do I need?
For families with multiple special needs children this is often an issue. A single trust may give more flexibility but separate trusts may be necessary when one child’s disability is more severe than the others and that child is likely to drain the funds quickly. Since each family will have unique circumstances, a knowledgeable attorney should be able to walk you through all of the pros and cons.
6. What is a pay-back provision and do I need one?
A pay-back provision provides that the special needs trust will reimburse the state for expenses (i.e., health care costs under Medicaid) after the child’s death. These provisions are not required in all special needs trusts and a knowledgeable attorney should know this. In fact, it is primarily necessary where the special needs trust is funded with assets from the child-a common scenario where a special needs trust is formed for a child involved in a personal injury accident. But for children with developmental disabilities, the special needs trust is established with assets from the parents and other family members.
7. Will you help us explain this to our family members?
A committed attorney will at least offer a client-friendly article or brochure on how special needs trusts work and how other family members can contribute to it. This ideal attorney will also be available to answer questions from family members and/or their attorneys about coordinating their estate plans with the trust.
8. Once the special needs trust is established, is there anything else we need to do?
A knowledgeable attorney should not only help establish the special needs trusts, but should also give guidance as to when or how often the trust may need to be updated. Whether dealing with a revocable or an irrevocable special needs trust, all newly acquired assets, such as new life insurance policies, should be added to the special needs trust.
Shannon Nash is the proud mother of a lovely 4 year-old autistic boy. She volunteers her time with several special needs and autism nonprofits and is a director on the board of the United Autism Alliance, a Los Angeles based national autism advocacy nonprofit. She will be chairing an 8-week advocacy program for parents of special needs children on Family Life and Financial Planning sponsored by Pause 4 Kids, a Thousand Oaks Ca education nonprofit – these materials will be available on line at http://www.wachbrit.com. She we also be presenting a seminar on Special Needs Trusts at the California TASH 20th Annual Conference.
Shannon is a tax attorney and CPA. She is a graduate of the University of Virginia School of Law. She is currently writing a handbook for special needs parents on various issues including special needs trusts. She lives in Westlake Village, CA, with her son, husband and Chocolate Labrador Retriever. Shannon may be reached at email@example.com.
“Reprinted with permission from the March-April 2003 issue of the Autism Asperger’s Digest, a bimonthly 52 page magazine devoted to autism spectrum disorders. Published by Future Horizons, Inc. For more information: www.autismdigest.com or call 800.489.0727.”