Legal Considerations of Special Needs Planning

Legal Considerations of Special Needs Planning


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 

so we can protect and maneuver our assets and have the ability to successfully transfer these assets 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 will be a reflection of what is important to your family; where your values lie. So the discussion will begin with 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 since many of these people could assist in executing the wishes that have been 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 so they are all 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 for 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 that has specific expertise in laws pertaining to Medicaid and Social Security and most preferably have a designation of an elder law or trust and estate attorney. This is important because 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.

It also makes sense to make family decisions regarding how the family would like for the trust to be carried out before meeting with an attorney so the attorney knows what direction to go in from the beginning of the process. The attorney will need to know if you intend on initiating a revocable or irrevocable trust. The attorney can listen to your desires for the trust and help direct you on which is best suited for your family. 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 his or her tax return as such. On the other hand, an irrevocable trust has hits 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. Again, it’s a good idea to 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. 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

It’s understandable as parents 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 to oversee these decisions, right? Maybe. Then again, perhaps not. Managing an operating trust can be a great deal of work. Learning and implementing all of the tasks related to, for example, taxes and investments, is no small endeavor. Family members and/or family friends may not have the base of knowledge to work from like a corporate trustee would. Corporate trustees, such as banks and trust companies can be great options given they have are external and objective entities, have specific expertise in the managing of trusts, and are strictly monitored and audited. Parents or another family member who is experienced in managing investments or has the skills and know how to monitor other professionals, such as accountants or investment managers, could be a viable choice to serve as a trustee. A family member that is a trustee can hire other professionals for assistance, but those other 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. There can be many reasons why a trustee would need to be changed, be it poor performance or simply the trustee’s desire to longer perform the duty. Your attorney would need to include the trust protector’s responsibilities in the trust.

Whatever direction you choose as far as selecting a trustee for your child’s trust, make sure to weigh out the positives and negatives or assigning a professional versus a family member. Either can work if the pieces fit.

What is a Durable Power of Attorney (POA) and do I need one?

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 that you decide to designate is called an attorney-in-fact or an agent. You have the ability to construct the limits of your agent’s authority as you choose. A “durable” POA is one drafted with the provisions that it remains effective even if you become disabled or you are not able to communicate. A POA essentially dissolves upon your death.

So, what does this have to do with you? Well, if you are caring for a special needs child, it is important that you have someone designated to take over for you if for some reason you are temporarily unable to fulfill your duties as a caretaker. If it appears that you will be disabled on a permanent basis, the court will need to delegate a successor for you. If you are using this POA to assign power for personal affairs, you will most likely want to have your spouse a family member perform this duty. Keep in mind that unless you include medical provisions in your POA, your agent will not have the authority to make any of these decisions. A separate medical POA would be required.

A durable POA can have its advantages for an individual with a mental illness that does not have a guardian. This document would allow for someone to intercede if necessary if, for example, an individual had a psychotic episode and hence were temporarily unable to make decisions for themselves. There can be an issue with this, however. This principal has the power to revoke a POA at any time, so when this individual may need this sort of help the most, for example, when he or she might be in a manic episode, it can be removed. With this in mind, there is something called a Psychiatric Advance Directive (PAD) which cannot be revoked by the individual in need of psychiatric attendance. An “instructive” PAD can be initiated by someone with a mental illness, while displaying competency, who wishes to outline his or her preference for treatments in the event that they are incapacitated. It is also possible to appoint someone to make these decisions if it is a “proxy” PAD. As this is being written, 25 states have specific PAD statutes in place and most states have some form of accepted legal advances (AD) for healthcare.

You need a Will. You just do.

A will elects someone to handle your estate and finalize your affairs after you are deceased. It also makes sure that you transfer what assets and to whom after you die. A very important purpose for our discussion here is that of appointing a guardian for a child who is unable to care for him or herself. Both parents should have a will in place. Typically, one spouse assigns guardianship to the other in the event of their death. A parent should also have a succession plan several layers deep to accommodate the possibility that one of your designees either passes away or resigns as a guardian. Special attention should be paid to what is called a residual property clause, which transfers remaining property or cash not specifically mentioned in the will. You will want to make sure that assets don’t inadvertently get passed to a special needs child disqualifying him or her from their government benefits.

Review your will periodically with your trust or estate attorney. You can amend you will as needed throughout your life as circumstances change, but you may consider replacing your will if major changes are needed to avoid any misinterpretation or confusion.

Can I just go online and print these things out myself? Do I really need a professional?

Some people have a limited amount of possessions and do not have children. In this case, sure. There are online will templates and forms that can be downloaded and filled out without the aid of an attorney. Parents of children with special needs shouldn’t take the risk of preparing documents that are not valid due to incorrect preparation. For example, if a will is not witnessed correctly, it may not be valid. Also, if a will is partially printed and partially handwritten, this can also make the intentions ambiguous and difficult to honor. Also, medical directives that are not written clearly and/or are handwritten may not be accepted by medical professionals.

In other words, this is not the time to take short cuts. It’s very important to find an elder law or trust and estate attorney to help you with the drafting of these documents to ensure that they are drafted correctly and include all of the necessary components to protect your loved ones. FamilyVest works with Attorneys throughout the country.  Schedule a free consultation today!