Why Do I Need an Estate Plan?
What is an estate? An estate is basically everything someone owns. This includes business holdings, personal possessions, financial assets, real estate, insurance policies, and more.
The reason we need an estate plan is to protect and manage our assets and successfully transfer them to others as we wish during our lifetime or after our death. It’s important to begin an estate plan with a holistic family point of view. This estate plan reflects what is important to your family and where your values lie. For families with a child or dependent with a disability, these estate planning decisions take on additional weight—they directly affect eligibility for government benefits. This guide covers the legal considerations specific to special needs planning, from trust structures to guardianship decisions.
Start by figuring out what you want exactly to happen for your child, and then how to create that outcome. Using your child’s support system of friends and family will be important during estate planning. Many of these people could assist in executing the wishes you’ve expressed for your child after you are no longer there.
Items such as the Letter of Intent, wills, medical directives, and trusts can be reviewed with this group. This ensures everyone is aware of what has been discussed and decided upon to help plan for a supportive and caring environment for your child.
How Can I Use a Special Needs Trust in My Estate Plan?
One very useful tool used for planning for a child with special needs is a Special Needs Trust (SNT). This trust begins with a trust creator or a “trustor” or “grantor,” with provisions for the management of the property or money by a legal entity or individual called a “trustee.” The person for whom the trust is drafted is called the “beneficiary.”
This type of trust is an excellent tool because it allows parents to allocate money to care for their child while preserving SSI, Medicaid, and other state services since trust assets are not put toward the $2,000 asset limit that these programs require for eligibility. It is intended to supplement, not take the place of, government assistance. The purpose of SSI is to assist with housing expenses and Medicaid to pay for healthcare. Consequently, funds allocated from a SNT are intended to enhance the quality of life of the beneficiary and not duplicate these government programs.
It is important to have this document drafted by an attorney with specific expertise in laws pertaining to Medicaid and Social Security, ideally with a designation as an elder law or trust and estate attorney. For a SNT to be valid, the language must be in accordance with articles in the Social Security Act. The SNT must clearly convey that the beneficiary has no access or control of the assets in the trust.
Before meeting with an attorney, make family decisions regarding how the family would like for the trust to be carried out. This ensures the attorney knows what direction to go in from the beginning of the process. The attorney will need to know if you intend to establish a revocable or irrevocable trust.
Revocable vs. Irrevocable Trusts
A revocable trust gives the creator of the trust more flexibility and control. A revocable trust is often called a “grantor trust.” Any income from a revocable trust is deemed income of the grantor and is reported on their tax return as such.
An irrevocable trust has its own tax ID number and is considered its own taxable entity that is required to file a Form 1041 annually to report trust income taxes. You would not want to keep earnings in an irrevocable trust as the taxes could be quite high for these earnings.
Consult with your attorney, and possibly a CPA or tax attorney if you are a high net worth individual, about which type of trust to utilize based on your individual circumstances.
Who Will Act as a Trustee?
This can get tricky. Choosing the right trustee—whether a family member, a corporate trustee, or a co-trustee arrangement—is one of the most important decisions in special needs planning. For guidance on evaluating trustee options and understanding the role, see how to choose a trustee for your special needs trust. First, let’s take a look at what some of the responsibilities are of a trustee:
- To act as a fiduciary for the trust beneficiary. This means that any and all decisions must be made with the best interest of the beneficiary in mind with a relationship based on good faith, honesty, and trust.
- To make payments or distributions of funds to the trust beneficiary
- To manage the preparation of tax filings and attempt to minimize trust taxes
- To submit annual reports to whomever is required to receive one based on state statutes or per the trust agreement
- To stay abreast of eligibility requirements for SSI and Medicaid programs, directing the trust as to maintain these benefits.
- To deliver any and all other responsibilities outlined in the trust agreement
As parents, it’s understandable to believe that a business or corporate entity would not be able to make the best decisions for their child’s well-being. Surely a family member or close family friend would be the best choice, right? Maybe, but managing an operating trust can be a great deal of work.
Learning and implementing all of the tasks related to taxes and investments is no small endeavor. Family members and family friends may not have the knowledge base that a corporate trustee would possess. Corporate trustees, such as banks and trust companies, are external and objective entities with specific expertise in managing trusts. They are also strictly monitored and audited.
Parents or another family member who is experienced in managing investments or has the skills to monitor other professionals could also serve as a trustee. A family member trustee can hire other professionals for assistance, but those professionals cannot be assigned fiduciary responsibilities. These remain with the trustee only.
Additionally, it can be beneficial to have a trust protector or trust advisor. A trust protector has the authority to appoint or replace a trustee if needed due to poor performance or the trustee’s desire to step down. Your attorney would need to include the trust protector’s responsibilities in the trust.
Whatever direction you choose for selecting a trustee, weigh out the positives and negatives of assigning a professional versus a family member. Either can work if the pieces fit.
What is a Durable Power of Attorney (POA)?
A Power of Attorney (POA) is a legal form used to designate someone to take care of your affairs when you are not able to. The individual you designate is called an attorney-in-fact or an agent. You can construct the limits of your agent’s authority as you choose.
A “durable” POA remains effective even if you become disabled or unable to communicate. A POA essentially dissolves upon your death.
If you are caring for a special needs child, it is important to have someone designated to take over for you if you are temporarily unable to fulfill your duties as a caretaker. If permanent disability occurs, the court will need to delegate a successor for you. When your child reaches adulthood, you will need to establish legal authority through guardianship, guardian advocacy, or other supported decision-making structures to continue making decisions on their behalf.
If you use this POA for personal affairs, you will most likely want your spouse or a family member to perform this duty. Keep in mind that unless you include medical provisions in your POA, your agent will not have authority to make medical decisions. A separate medical POA would be required.
Psychiatric Advance Directives
A durable POA can have advantages for an individual with a mental illness who does not have a guardian. However, the principal has the power to revoke a POA at any time, which can be problematic when help is needed most.
A Psychiatric Advance Directive (PAD) cannot be revoked by the individual in need of psychiatric care. An “instructive” PAD allows someone with a mental illness (while competent) to outline treatment preferences if incapacitated. A “proxy” PAD allows appointment of someone to make these decisions. As of now, 25 states have specific PAD statutes in place, and most states have some form of accepted legal advance (AD) for healthcare.
Do I Need a Will?
Yes. A will designates someone to handle your estate and finalize your affairs after you are deceased. It also transfers your assets to whomever you choose.
A very important purpose is appointing a guardian for a child who is unable to care for themselves. Both parents should have a will in place. Typically, one spouse assigns guardianship to the other in the event of their death.
You should also have a succession plan several layers deep. This accommodates the possibility that one of your designees passes away or resigns as a guardian. Special attention should be paid to a residual property clause, which transfers remaining property or cash not specifically mentioned in the will. Ensure that assets don’t inadvertently go to a special needs child, which would disqualify them from government benefits.
Review your will periodically with your trust or estate attorney. You can amend it as circumstances change, but consider replacing it if major changes are needed to avoid misinterpretation or confusion.
Do I Really Need a Professional?
Some people with limited possessions and no children can use online will templates. However, parents of children with special needs shouldn’t take the risk of preparing documents that are invalid due to incorrect preparation.
For example, if a will is not witnessed correctly, it may not be valid. If a will is partially printed and partially handwritten, this can make intentions ambiguous and difficult to honor. Medical directives that are not written clearly or are handwritten may not be accepted by medical professionals.
It’s very important to find an elder law or trust and estate attorney to help draft these documents. Ensure they are drafted correctly and include all necessary components to protect your loved ones.
