Estate Planning for a Retarded or Disabled Child

Estate Planning for a Retarded or Disabled Child

John and Susan Smith are 67 years old, and have been married for 39 years. They have four children, one of whom, Evan, has Multiple Sclerosis. Evan is 35, and was married for several years, but is now divorced and lives with John and Susan. He has a degree in math, but is unable to work full time. He currently works part time as a consultant, and supplements his income by tutoring children after school.

John and Susan are aware that Evan’s illness may progress to the point that he will be unable to support himself and they have come to my office seeking an estate plan that will provide for Evan after their deaths.

John and Susan have an estate worth approximately $1.25 million, including a $250,000 life insurance policy on John’s life. Before Evan became ill, John and Susan intended to divide their estate equally between their children, but now they are uncertain. Their other three children are all self-supporting; Tom is a principal of a high school, Elizabeth is a travel agent, and Rebecca is a nurse. Each of the Smith’s healthy children has two children, for a total of 6 grandchildren.

With bypass trusts, the Smiths will not have to worry about estate taxation, so taking care of Evan without disinheriting their other children is their major concern. To care for Evan while still respecting the needs of their other children can be accomplished with a Special Needs Trust.

A special needs trust is a trust that provides for a disabled individual without jeopardizing any entitlements to public benefits that the individual may have as a result of his or her illness or disability. An entitlement may be Social Security benefits, Medicaid or any other public benefit which the individual may receive. Benefits under these programs may be jeopardized if the individual has assets or income in excess of what the benefits program allows them to have. In Evan’s case, he is still working and does not yet receive any public assistance. If his illness progresses so that he cannot work, he may have to apply for benefits to be able to support himself. Once his application for benefits is approved, he will not want to do anything to jeopardize his right to receive the benefits.

A special needs trust provides funds to buy extras for the beneficiary when his basic needs are met by public assistance. The trust assets do not count as excess assets when computing the beneficiary’s benefits under an entitlement program because the beneficiary does not have any ownership interest or absolute right to the trust assets. Distributions under the trust provisions are at the discretion of the trustee, whose job it is to see that the distributions do not interfere with the entitlements. Caution: this is not a trust to try to do yourself- if a special needs trust is not written to comply with state law, the trust assets may be taken by whatever agency provides the benefits, and the assets will be used to support the disabled individual. In addition, any entitlement will be lost due to an excess of assets in the ownership of the person receiving the benefits.

John and Susan decide to execute a special needs trust for Evans benefit. The provisions of the trust are that one half of their combined estate, less the life insurance proceeds, will be distributed equally between their three healthy children at the time they both die. The remaining half, plus the life insurance proceeds, are held in trust for Evan’s benefit under the provisions of the special needs trust. The Smiths choose Rebecca as the trustee because of her sensitivity to Evan’s needs and her medical knowledge. She will oversee the investment, management and distribution of trust assets for Evan’s lifetime. The special needs for which the trust may provide are needs beyond those of everyday maintenance or support needs (everyday support and maintenance needs are assumed to be provided by public entitlement). The trust, for instance, might provide for trips, entertainment, extra clothing or furniture. It might provide a new television set or a stereo system. If there is a desired medical procedure that is not covered by Medicaid, the trust might pay for it.

At Evan’s death, since he has no children of his own, whatever remains of the trust will be divided equally between Tom, Elizabeth and Rebecca. If any of the siblings die before Evan, the share of the deceased child passes to his or her children.

A special needs trust is a very helpful tool for a family with a disabled child who may not be, is not, self-supporting. Whether the child is 6 or 40, mentally ill, mentally retarded, autistic or ill, a special needs trust provides funds to care for that individual. Whether funded with family assets (in the case of a family with a large estate) or funded with a life insurance policy bought specifically for that purpose, the trust provides a sense of security to the parents and the siblings of the disabled individual because their disabled loved one will be cared for. Since the parents can usually care for the child during their lifetimes, a second to die life insurance policy (one that insures the lives of both parents) can be an inexpensive way to fund a special needs trust. The brothers and sisters of the disabled child are spared the daunting task of trying to care for their own children and their disabled sibling, and generally agreeable to a larger-than-equal share of the family assets going to fund the trust.