CHAPTER 8:
PLANNING FOR CHILDREN OR GRANDCHILDREN WITH DISABILITIES
After a post-retirement five-year stint as a special education substitute para-educator, I am convinced this topic deserves its own chapter. There are many, many more families with intellectually or physically disabled children than I ever imagined. For decades they were marginalized or simply ignored. Even today, the need for services to this community far exceeds the supply.
Planning for these kids involves the harsh reality that their primary caregivers – parents or grandparents – will not be around forever. And even while alive, these caregivers will age and almost inevitably become too infirm to provide the necessary level of care.
Rule One in Estate Planning for Special Needs Children – Think Ahead
If you plan on leaving money to a child with special needs, think carefully. Without proper planning, your child’s inheritance could very easily destroy his or her eligibility for public assistance.
We are in an era of increasing government debt and decreasing public resources. Considering the high cost of care for special needs children, parents and grandparents who lack enormous wealth certainly want the benefit of whatever assistance society provides now and in the future.
Special needs planning is highly state-specific, so we only deal with generalities here. This is not a comprehensive guide to disability planning. We are only addressing a very limited aspect of that issue – how to handle the transfer of family funds to a disabled child.
Your state certainly has program(s) or rule(s) of great importance to your family’s situation that won’t be covered here. This is absolutely not do-it-yourself stuff, and online document-preparation services can’t handle it. You need a lawyer who regularly practices in this area.
In a nutshell, the challenge is this: Parents of special needs children want to provide as much as possible for their lifelong needs, care and comfort.
But public benefit programs impose very strict – and very low – limits on the family or personal resources available to these children. As a general rule, if a child, young or adult, has too much money available to them, they won’t qualify for – or will quickly be kicked off – public assistance.
Government assistance is indispensable to a great many disabled Americans, but it is means-tested. Fortunately, there are some tools, workarounds and loopholes in the rules that parents and grandparents can use to maximize their own assistance to special needs loved ones, while maintaining eligibility for government benefits. Caregivers should be aware of them and their strict requirements.
The Two Primary Modes of Government Assistance for the Disabled
The brief descriptions below are greatly oversimplified but suffice for our purposes.
Supplemental Security Income (SSI)
SSI is a federal, means-based income supplement program that provides a monthly payment to help meet the basic needs of qualifying disabled (and elderly) citizens. People eligible for SSI are automatically Medicaid-eligible.
Medicaid
Medicaid is a state administered system of medical care for low-income people. It is jointly funded by the federal government and the states. Within federal guidelines, each state sets its own eligibility requirements and determines the services offered. These include an array of health-related benefit programs known by a variety of names. Medicaid is one of the most comprehensive payers for special needs children’s services.
Special needs children typically receive (among other services): physician and hospital care, prescription medications, medical equipment (e.g., wheelchairs, tablet devices for communication, feeding tubes), physical therapy and behavioral health and autism-related services.
Everyone recognizes the advantages to the government and all parties if care can be provided at home rather than in an institution. So, in addition to basic Medicaid, there is also an irregular patchwork of state-based services and rule-bending (i.e., “loopholes”).
These allow some services to be provided to some children in some states in situations where these people might not otherwise be covered. Since almost all the details depend on your state, this Crash Course is not intended to provide information on these topics.
Understanding the Two Basic Types of Special Needs Trust (SNT) – A Very Useful Tool in Estate Planning for Disabled Children (and the Elderly)
The primary focus of this Crash Course is helping people plan for the next generation. But if you have an elderly loved one who will be requiring state assistance for long term care, the SNT is definitely of importance to you, too. So read on.
These are also called “Supplemental Needs Trusts;” We use the acronym SNT here. The word “supplement” is key to understanding this estate and financial planning tool. The beneficiary of an SNT is a disabled person receiving government assistance.
The SNT document directs the Trustee to use Trust funds to enhance the beneficiary’s quality of life by supplementing – not replacing – whatever benefits federal and state governments provide. Precise language in the Trust document as to this purpose is legally crucial.
There are two broad categories of Supplemental Needs Trusts:
Trusts Created with the Beneficiary’s Own Funds
These are “first party” Trusts; In legalese, the beneficiary is the “first party.” When disabled people eligible for public assistance receive a large sum of money, their life gets more complicated. There are two situations in which this regularly occurs: first, an inheritance without proper planning, and secondly, the payout from insurance or a lawsuit after a catastrophic personal injury.
In these situations, the law allows the family of the disabled person to establish an SNT, provided that public funds expended for the beneficiary are paid back if anything is left in the Trust after the disabled beneficiary dies. These Trusts are sometimes called “payback” SNTs. Note that in some states, court approval is required to establish a first party SNT.
You can see an effort in the law to balance the interests of the taxpayer with those of the disabled citizen “lucky” enough to come into such a windfall. On paper, these folks can appear suddenly wealthy and would otherwise be completely ineligible for public assistance.
Without the help of the law, their “fortunes” would have to be (almost) totally depleted before they could receive public benefits. Many would quickly become destitute and helpless during the lengthy application process. On the other hand, if the SNT has money remaining upon the beneficiary’s death, it seems only fair that the taxpayer be repaid.
Trusts Created by a Third Party Using Their Own Funds
The third party in these situations is usually the disabled person’s parents or grandparents. These Trusts are based on two simple principles: First, the strict legal duty of parents to support their children – even if disabled – with food, clothing and shelter ends at the age of adulthood – usually 18 or 21.
Secondly, money spent to provide a disabled person with things other than the essentials of life does not reduce their government benefits.
The basic care of disabled persons after the age of adulthood becomes largely the responsibility of their state. So with this kind of SNT, no payback is required. After all, at that point the third party (parent or grandparent) has no legal duty to provide anything to the adult child. (Of course, most would feel a moral duty to their child to help as much as possible.)
When the disabled person dies, anything left in the Trust can be paid to someone else. (Very commonly, whatever is left in the Trust is designated to go to a charitable organization dedicated to medical research or advocacy on behalf of the disabled.)
All distributions or payments from the Trust are made at the sole discretion of the Trustee, directly to providers of goods and services to the beneficiary.
It’s essential that the SNT is worded so that the beneficiary has no right to demand that the Trust pay for any good or services.
Otherwise – if the beneficiary’s basic needs are provided by a Trust – they would have no need for government assistance and wouldn’t qualify for it.
What Can a Special Needs Trust Provide?
There is a long list of “almost” necessities and small luxuries that most of us enjoy and would like to provide for disabled loved ones. Without interfering with the beneficiary’s eligibility for benefits, an SNT should allow – but not require – the Trustee, in their sole and absolute discretion, to use funds for such goods and services. Your state rules might differ slightly, but a partial list of examples usually includes:
- Eyeglasses and other out of pocket medical and dental expenses
- Transportation to and from daily activities
- Travel (including the expenses of a companion) to visit relatives, for example
- Entertainment, such as movies and recreational activities
- Special dietary preferences or food “treats”
- Materials or other costs of a hobby or educational activity
- A computer, television, telephone, Internet and cable TV
Generally, the Trustee should be prohibited from making direct payments of cash to the special needs beneficiary, except maybe a small “pocket money” allowance – if permitted by state regulations. The Trust document should state that the special needs beneficiary has no power to compel the Trustee to make any distribution of any kind to any party.
A properly drafted SNT contains special language to deal with unknown future legal developments; It basically prohibits the Trustee from making expenditures that would become problematic if state rules change. The Trustee can even be authorized to “doctor up” (amend) the Trust solely for the purpose of maintaining the beneficiary’s qualification for government aid. This allows the Trust to adjust to larger, unforeseen shifts in the legal landscape.
The bottom line: An SNT should be prepared only by a lawyer with thorough knowledge of your state rules and experience in this area.
But what can people do if they can’t afford the several thousand dollars it costs to hire that attorney? What about the time, effort and ability to perform the multiple, ongoing duties of the SNT Trustee? Fortunately, there’s a good alternative.
Pooled Trusts – A Good Option for Families of Ordinary Means
A Pooled Trust is an SNT managed by a nonprofit organization. Pooled Trusts may be used by beneficiaries of any age. These organizations combine (“pool”) the funds contributed by multiple, unrelated beneficiaries. Each individual beneficiary has their own sub-account and receives their proportional share of the funds as they are professionally invested and managed.
Beneficiary distributions are determined separately based on individual needs. This is a huge advantage. Nonprofit organizations that offer Pooled Trusts have extensive experience in this field. They handle all compliance details regarding the disabled beneficiary’s income and resources.
The Arc of the United States is one of the best and most reputable organizations to look to for a Pooled Special Needs Trust. Its regional and state chapters run some of the oldest, largest, and most stable pooled special needs trusts in America. The national headquarters is an advocacy and valuable resource center.
All good Pooled Trust sponsors closely follow the applicable laws and financial regulations. This ensures you are following the complex Medicaid and other legal rules and guidelines if and when they change.
In addition to these compliance responsibilities, the Trustee must know how to invest money wisely. Managing an SNT for a loved one can be a long-term, complex and time-consuming task. All this is simply too much for most families. Realistically, there may be no one ready, willing and able to fulfill all the Trustee’s duties.
Costs associated with a Pooled Trust often include a one-time enrollment fee, a monthly administrative fee, and an annual renewal fee. But the upfront cost in joining a Pooled Trust will usually be less than setting up an individual SNT using your own attorney.
Another big advantage of the Pooled SNT is the low required minimum funding requirement – generally only a few thousand dollars. No bank or Trust company will give you the time of day for that size account.
In a Pooled Trust, administrative services, management and investment fees are split among a large group of Trust beneficiaries. This saves money and provides broader investment opportunities than a smaller, individual SNT has. Yet each member’s sub-account is created and designed to fit their specific needs.
So, in sum – for those of us of ordinary means – Pooled Trusts are usually a smarter choice than an individual SNT.
Miller Trusts – When Ongoing Income is an Obstacle (Elderly Folks Who Need Long-Term Care Assistance – This is for You Too!)
As we have discussed, the rules on government assistance are complicated and vary widely by state. So this section is very short and general – intended just to alert you of a planning tool useful to some. Miller Trusts are useful in states (about 25) that use a strict, flat monthly “income-cap” to determine eligibility for Medicaid.
A Miller Trust (also called “Qualified Income Trust”) and a Special Needs Trust (SNT) may be used separately or in tandem in a plan to qualify for government assistance – both for children (young or adult) and the elderly, wishing to qualify for Medicaid long-term care.
These two kinds of Trusts deal with two sides of the financial coin: first, a person’s ongoing monthly income and secondly, their money and property already on hand. Both these issues present distinct financial problems for an individual with disabilities or one who simply needs long-term care as part of the normal aging process.
We’ve seen how SNTs can be used when a disabled person has too much money available now to qualify for government assistance (i.e., sudden money from a lawsuit settlement or inheritance). But be aware of how one can deal with excess regular monthly income in those states that have strict income limits (monthly lawsuit payouts, pension payments, Social Security, etc.) for people applying for benefits. In these situations, the Miller Trust can be used.
The name “Miller” comes from a 1990 federal court case in Colorado in which Ms. Miller was a party. The court approved the use of the technique we’re talking about here, and it became known as a “Miller Trust.”
The benefit recipient’s excess (over the state limit) monthly income is deposited into a Miller Trust, which is irrevocable – it cannot be undone. The Trustee then uses these funds to pay for state-approved medical expenses, health insurance, and a small personal needs allowance. When the beneficiary passes away, the state Medicaid agency’s care costs are paid back from any funds remaining in the Trust.
Miller Trusts can also be used by elderly people with incomes a bit too high to qualify for Medicaid, but who still need state-provided long-term care – either in a nursing facility, or, in some states, at home.
When it comes to government assistance, the devil is always in the state details. We can’t go into them all here. But even folks who have an income that seems too high to qualify for benefits might have the Miller Trust to help them get those benefits anyway. Just keep this tool in mind if you’re in that situation.
A Final Word About Planning for the Disabled with an SNT or Pooled Trust
Maintaining eligibility for government assistance is almost always the primary consideration in financial and estate planning for families with disabled or special needs children. Again, remember that if parents leave assets directly to a child who is receiving government benefits, they will likely cause the child’s immediate disqualification.
But this consideration should not obscure all others. Many disabled individuals have normal life expectancies, but will never be able to fully provide for their own support. Meanwhile, parents want them to have all the “extras” the law will allow. So parents must make comprehensive arrangements for good long-term care of their disabled children after they are not here to do so themselves.
That takes money. Life insurance – if used in the proper way – is an ideal tool to provide it long after the parents are gone.
An SNT can be the ideal way to provide money management and support services for these children throughout their lives. In other words, an SNT is not simply a matter of qualifying for government assistance.