Estate planning is always hard. Nobody knows the future, and spelling out how and where to distribute your assets isn't only a challenge, there are innumerable scenarios that could play out with time. Families with special needs children know that all too well.
A traditional estate plan calls for distribution of property and often a trust to determine timing, monetary sums and tax implications. A special needs family can follow a similar approach but, given health and mental capacity concerns, it presents extra challenges. Especially when considering government programs.
Life with a disability often means you need access to savings accounts for emergency medical concerns, and traditional savings plans and inheritance models either lock the money out of reach or come with tax costs.
Social Security and Medicaid are government programs that help parents, guardians and special needs adults with their disability. These benefits are essential due to limitations that keep people from working full-time or living an independent lifestyle. Different disabilities, of course, involve different income streams and benefits available, as well as the degree of independence.
However, there are stipulations to receive benefits and they most often tie to income and assets. Gifting inheritance to a special needs child may put them over the threshold and disqualify from receiving essential benefits, not to mention medical care.
Supplemental Needs Trust
A Supplemental Needs Trust (also called a Special Needs Trust) is a special estate plan to accommodate special needs families. Like a standard trust, the effect is to create an entity controlled by a third party trustee who will then distribute funds to your heirs.
The role of a trust is to separate individual from assets. The trustee is an administrator of the fund. The trustee oversees the funds and, depending on the document, can schedule payments, purchase goods for a special needs child, and more. Meanwhile, distribution can work in tandem with assistance programs to make sure that your loved one sticks to the same benefit program without interruption or violation of federal requirements.
A trustee is often a family member, but it does not have to be. If there is no preferred trustee for your special needs child, there is an option called a pooled trust. In this arrangement, a nonprofit organization can act as administrator to the fund.
Savings and insurance
Traditional savings accounts are problematic for special needs individuals because the best savings plans face early withdrawal fees. Due to the medical needs that accompany a disability, it's impractical or impossible to set money aside long term without guaranteed access.
In 2014 Congress passed the ABLE Act, allowing specialized savings accounts that grant a tax-incentivized savings option for families. This allows savings of up to $100,000 before government assistance eligibility is affected.
Another option to compensate the costs of special needs is to purchase second to die life insurance policies, where the heirs receive benefits instead of a surviving spouse.
Specialized plans matter
If you were simply to will assets to your children, you run the risk of disqualifying them for government assistance or for misuse of the funds. For example, before the creation of Special Needs Trusts, families would will the inheritance for a disabled child to a responsible sibling. If that sibling encountered debt problems or other financial issues, those funds would be squandered. Through a trust, you can say exactly how and to whom your inheritance will be delivered, ensuring that you're taking care of your family even after you're gone. A trust can't predict the future, but it can plan for it.