Estate planning when you have a disabled child is like trying to construct a safety net while gazing into a crystal ball.
Will your child be able to function as a fully independent adult or need some form of continuing care? Will he be eligible for government funding, or capable of holding a job? And where will he live when you are no longer there?
Dealing with such uncertainty often turns estate planning into an emotional arena for parents of disabled children. “You are dealing with families that have a lot of fear, guilt and anger,” says Steven C. Rhatigan of Houston, a fee-based adviser who specializes in estate planning for the disabled.
But as wrenching as the experience may be, it is important to recognize that your disabled child likely will continue to need your assistance long after your death. That means you need a plan, and you need to make it flexible enough to work despite an uncertain future.
Perhaps the best way to get started is to work backwards, “Start your plan with your destination in mind,” says Mr. Rhatigan. Decide where you would like your children to be if you died tomorrow, he says, and work from there.
As with more traditional families, you start by making a will. But in deciding how to divide your assets, it is necessary to take into account a major factor other parents don’t have to think about: government funding. Government programs are necessary for many disabled people since care is expensive and can rapidly deplete a family’s finances.
But there are lots of things the government don’t cover, such as over-the-counter medicines, trips to family members, reading material and even soap. Typically, it is the parents who fill the gap and pay for these items.
Upon their deaths, however, parents can’t simply leave money to their disabled child to continue this spending. Inheriting as little as a few thousands dollars can cut a child off from needed programs, says New York attorney Peter J. Strauss. That means parent need to find a way to pay for these items without actually giving money to the child.
‘Special Needs Trust’
The answer, for most, is a “special needs trust.” Properly crafted, such a trust not only protects access government funding but also creates a whole management system to support the child. “This is the best planning route for a disabled child,” says Mr. Strauss. Wording is critical, as is the careful assignment of authority. The beneficiary, for example, can have no answer over the trust or its assets. Moreover, the trust must be specifically created to be supplemental, providing only extras for the child.
“Health, welfare and support. Those are the killer words,” says Mr. Rhatigan. “If those words appear in the trust, then the Social Security Administrations is going to view that trust as primary and will insist that those monies be spent first.”
The document also should include an escape clause terminating the trust and distributing the assets if there should be any serious attempt by the government to break the trust.
Before creating a trust, the family must thrash out some important issues. The first is deciding who will assume responsibility for the child after the parents’ deaths. Family members are often the best option, and advisers says it is important to name may backups.
“Allocate responsibility in a way that matches up with strengths and weaknesses of individual family members,” says Donald N. Freedman, a Newton, Mass., attorney, noting that one person may be better at managing trust investments than actually deciding how the money is spent. “You want to avoid burning out specific family members.”
In some cases, there are no family members who can take on the responsibility for a disable child. Here parents may turn to professional trustees, such as banks. Those most suited to the task are likely to have social workers and private care managers on staff.
Another alternative is the use of a master trust of pooled trust, typically created by a nonprofit group to provide a management umbrella for funds from a group individuals.
Some parents opt to create their own alternatives. In many places, parents join together to establish group residences for their children; others agree to serve as trustees for each others’ children. Whatever option the parents choose, they should make sure the trustee is flexible enough to deal with changing circumstances.
The second important issue is how to allocate family resources. The problem here is that what is fair isn’t always equal. In many cases, the disabled child may simply need more. Parents need to do a realistic assessment of what the child’s needs will be, then have frank discussion with other members of the family.
How much is enough? That depends on both the severity and the type of disabi8lity. Start by looking at current costs, figure out what extras will be needed once the parents are gone, then factor in inflation.
Given sufficient resources, a common trust figure in the Boston area is around $250,000, Mr. Freedman says. That translates into about $1,000 a month, assuming the trust ears 5% after taxes and expenses. If parents decided to let the trustee tap trust principal, available monthly funds could be higher, but such a move would shorten the life of the trust.
From where does money to funds such a trust come? “Often in insurance policy is a wonderful solution,” says Karen Spero, a Cleveland financial planner. She notes that last-to-die policies, which are cheaper because benefits aren’t paid until the second parent dies, can work well in this situation. And since death benefits are usually paid expeditiously, funds will be available when needed for the child.
Having carefully crated and funded a trust, you still must make sure that the money is properly spent. If not, your child may lose government benefits anyway. Under Supplemental Security Income, for example, a recipient can receive only $60 of unearned income in any calendar quarter. That’s just $20 a monthly. Anything above that will reduce benefits on a dollar-for dollar basis.
Trustees can minimize the problem by keeping money out of the hands of the beneficiary, says Mr. Freedman. That means making payments directly to providers. Even large, saleable items such as furniture should be owned by the trustee, who then allows the beneficiary to use them.
Indeed, trustees and others who assume responsibility for a disabled child need a wealth of information to avoid such traps. That is one reason why advisers recommend that parents write a “letter of Intents,” clearly outlining the child’s history, setting priorities for care and services, and even discussing their own hopes and expectations.
“It is the little things that are going to make the difference for child,” says Mr. Rhatigan, explaining that such information will help the trustees and guardians make better decisions about treatment, living arrangements and other matters. And that can make such a letter “the most important part of the plan”.