Common financial concerns that need to be addressed are how to utilize appropriate financial and legal tools to preserve your child's eligibility for Supplemental Security Income (SSI) or other government benefits, how to address financial concerns of residential options, and how to identify and prepare for short- and long-term financial costs.
Many well-intentioned parents don't realize that an inheritance may cause many problems for their child. If the parent has no will or living trust, the state laws of inheritance will generally require that a portion of that parent's estate assets pass to the special needs child upon the parent's death. Under current federal law, any inheritance of more than $2,000 disqualifies disabled individuals for most federal needs-based assistance. Benefits from state public assistance programs may also be affected. These valuable benefits pay for medical, therapeutic, and support needs for the disabled individual.
To avoid this issue, the parent of such a child should consider establishing a special needs trust in his or her will or living trust and should provide in the will or living trust that any share passing to the child with a disability will instead pass to the special needs trust. The special needs trust should be an irrevocable trust after the parent's death. The designated trustee will then hold and disburse the trust funds for services and purposes on behalf of the disabled beneficiary in such a manner as to retain the beneficiary's eligibility for public benefits. Upon the death of the disabled beneficiary, the remaining trust assets will pass to those persons or charities designated by the parent in the special needs trust. This type of special needs trust is often referred to as a "third-party" special needs trust because it is to be funded with assets (such as gifts, life insurance proceeds, inheritance distributions) from parents, grandparents, or others, not with assets of the beneficiary.
On the other hand, if the disabled child has assets of his or her own, then a "self-settled" special needs trust may be an option. A "self-settled" special needs trust is generally established by a parent, grandparent, legal guardian, or court for the benefit of the person with disabilities but is funded with assets owned by the disabled beneficiary. Such assets can include a lawsuit settlement arising out of injuries to the disabled beneficiary, an inheritance, or a life insurance settlement that is to come directly to the beneficiary rather than to a third-party special needs trust. It is important to note that a "payback" provision may apply to "self-settled" special needs trusts, whereby benefits received by a disabled individual during his or her lifetime may need to be repaid to the applicable government agency upon the death of the disabled individual. This may limit the ability to bequeath remaining assets to a secondary beneficiary.
A special needs trust holds title to property for the benefit of a child or adult who has a disability. The special needs trust can be used to provide for the needs of a disabled person and to supplement benefits received from various governmental assistance programs. Special needs trusts typically provide for such things as medical and dental expenses, training programs, education and specialized therapies, and rehabilitation. They may also allow a trustee to give the beneficiary money for various forms of entertainment (e.g., movies), electronic and computer equipment, and trips and vacations.
A trust can hold cash, stocks, personal property, and real property. It can own and/or be the beneficiary of life insurance. Special needs trusts also can be used to protect personal injury settlements or judgments from jeopardizing government-benefit eligibility. Most importantly, special needs trusts can help parents coordinate their estate plans and provide peace of mind that their child will be provided for.
To prepare a special needs trust, professional help should be obtained. Certain financial planners specialize in special needs issues. In addition, some large financial services firms have divisions devoted to special needs families. An attorney and CPA who are knowledgeable about applicable state and federal disability laws and financial planning issues should also be consulted.
About the Author:
Jeannine Sheehan, CPA, is a senior manager with Mengel, Metzger, Barr & Co., LLP.
Mengel, Metzger, Barr & Co., LLP, an independent member of the nationwide BDO Seidman Alliance, provides a variety of financial services, including accounting, audit, and tax services; business valuation; litigation support; mergers and acquisitions; estate planning; and information technology services. The firm, established in 1975, currently has offices in Rochester, Elmira, Hornell, and Ithaca, NY. For more information, visit www.mengelmetzgerbarr.com.
