Lara Gilman

Kevin Rodriguez

Estate Planning for Special Needs Children

How to develop an estate plan that protects your client’s disabled children without disqualifying them from needed public benefits.

December 20, 2007
by Lara Gilman and Kevin Rodriguez

If you don’t already, you will likely have a client who has a child with special needs. The reality is that one family out of every 26 is raising a child with a disability (“Disability and American Families: 2006,” U.S. Census Bureau). A family having a disabled child will be subject to substantial economic costs in caring for the child throughout his or her lifetime. And the child’s public benefits may be jeopardized if the child inherits even a modest sum at your client’s death. As an advisor to the family, you will be involved in developing an estate plan that protects the child and does not disqualify him or her from needed public benefits.

Government Benefits and Cost of Care

When preparing the estate plan for a family with a special needs child, the planner must be fully aware of the effect the plan will have on the child’s eligibility for state and federal government benefits. Although some state and federal benefits are available to all persons with special needs, others are need-based, meaning that if the individual has more than a limited amount of income or assets, eligibility will be lost. When determining whether a person is eligible for need-based aid, gifts and inheritances will be included unless certain steps are taken beforehand to have them excluded. Most clients want to be sure that a gift or inheritance will not disqualify their child from public benefits.

In addition, a proper estate plan should protect the family against state claims for “cost-of-care” liability ” many of the state programs, while available to any disabled person, require either the family or the individual’s estate to reimburse the state for a percentage of the costs based on the amount the family can afford.

Important Estate Planning Tools for a Special Needs Child

Third-Party Supplemental Needs Trusts

The most common trust for a disabled child is a third-party supplemental needs trust (“third-party SNT”). A third-party SNT is a trust for the benefit of the disabled child funded with assets from a third party, such as a parent, grandparent, relative or friend. This type of trust, which is usually a stand-alone trust, but can also be drafted as a sub-trust to a revocable living trust, provides supplemental funding to any governmental benefits that the child may be receiving or could receive in the future.

In a properly drafted third-party SNT, the trustee has complete discretion in making distributions to or for the benefit of the disabled child. Thus, the assets of the trust are not counted as part of the beneficiary’s estate for the purpose of qualifying for governmental benefits, and the funds are not available to creditors or seizure. A key to this type of trust is choosing a proper trustee, as it will be up to the trustee alone to decide how to spend the trust assets. Since trust distributions for basic needs such as shelter, food and other essentials could reduce or even negate a disabled person’s governmental benefits, the funds must be spent wisely on quality-of-life items. Your client should also include a letter to the trustee informing him or her of the general lifestyle of the child, including the child’s preferences and needs.

Medicaid Payback Trusts

A Medicaid Payback Trust (also known as a “(d)(4)(a) trust”) is one of two types of special needs trusts to consider when the disabled individual has received a vested interest in assets such as from an inheritance, gift, settlement or judgment that would otherwise disqualify the person from governmental benefits. The disqualifying assets are converted into exempt assets and placed into a court-approved trust. During the life of the beneficiary, a parent, relative or friend acts as the trustee and supplements the child’s governmental benefits with the trust assets. While similar to the third-party SNT, this type of trust is subject to more restrictions as the funds may only be spent on court-permitted supplemental needs and the trust may only be established for persons under age 65. Furthermore, at the beneficiary’s death, the trust must reimburse the government for any Medicaid payments made during the beneficiary’s life, with the balance passing to the remainder beneficiaries of the trust.

Community Pooled Trust Account

The second type of trust appropriate when a special needs individual has received a vested interest in assets is a Community Pooled Trust Account (or a “(d)(4)(c) trust”). In this case, the assets are transferred to a qualified, non-profit charitable organization that manages a master trust for the benefit of many disabled individuals. A separate trust is established and held for the benefit of each individual, but the master trust pools the various accounts together for management and investment purposes. The charitable organization then administers the individual’s trust account with advice of designated family or friends of the individual. At the individual’s death, the trust assets may be kept by the charitable organization, used for reimbursement of Medicaid costs, and/or distributed to others per the terms of the trust. These types of trusts are usually beneficial where there is no clear choice for trustee and there is some charitable intent.

Awareness of Other Issues in Planning for a Special Needs Child

While the focus of this article is on the various types of trusts available to preserve the inherited or gifted assets of a person receiving public benefits, there are other important issues to consider in planning for a family with a special needs child. Examples are income taxes, Health Insurance Portability and Accountability Act (HIPAA) and community resources available to the individual and his or her family. As the family’s advisor, you can help them navigate this process.

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Lara N. Gilman is a partner and Kevin M. Rodriguez is an associate in Farella Braun + Martel’s Family Wealth Group. Their practices focus on creation of complex estate plans, trust administration and probate. For more information on selecting a guardian or other estate planning techniques please contact your Farella Braun + Martel Family Wealth attorney at (415) 954-4400 or one of the following: Fred Caspersen, Michael Korbolz, Kate Ohlandt. This information is provided as a service to our clients and friends. It should be viewed only as an overview of the law, and not as a substitute for legal consultation.