Special Needs Planning: A Complete View

When you hear “planning for family members with special needs,” your thoughts might jump to children with developmental disabilities. But the reach of special needs planning spans much further. For example, what about the family member suffering from a serious brain injury as a result of a car accident? Or the person who has mental capacity but physical disabilities that require long-term financial support to help with his or her care?

To provide effective special needs planning, it’s necessary to take a complete view. From family dynamics, to government programs, to establishing a trust, there are a variety of factors to consider in helping your clients with a special needs family member meet their financial objectives.

Taking a complete view means considering the family unit, which will have varying financial goals that should be incorporated into their planning needs. Finding the right plan to achieve these objectives requires a tough examination of both personal choices and available planning options.

Consider the family that plans to name a sibling as caretaker. Your clients may have an independent and financially savvy child whom they believe will be there to take care of a special needs sibling. So, they might intend to primarily benefit the sibling caretaker with the family inheritance. Lost in this planning solution, however, is that the sibling caretaker may have to draw upon these inherited resources to meet his or her own financial demands.

Further, although providing for financial assistance is a great start, it is equally important to examine the time, energy, and emotional support required to oversee care. Keep in mind that family members often underestimate these demands or feel guilty for not “giving it their all.”

Then there's the family that worries about benefiting a special needs child at all. Many families struggle with the concept of providing an inheritance to a special needs child, as they assume that government aid will be available to adequately provide for that individual's care. Or, some may fear that the inherited assets will cause further financial difficulties by interfering with aid programs.

Other objectives often come into play as well: 

• Treating other children equitably while providing for sufficient support for the special needs family member
• Finding the right way to manage and supervise the distribution of assets
• Wrapping the needed financial support into retirement planning (most important!)

A special needs trust can be a core component of special needs planning. It provides financial support without affecting the beneficiary’s eligibility for federal or state programs, which place limitations on the recipient’s income or assets to a specific level for benefits qualification. These trusts are often established by a third party (the beneficiary’s family) but may be established by the beneficiary (a self-settled trust).

Benefits of a third-party special needs trust include:

1. The assets aren’t considered available to the beneficiary for eligibility determination.
2. Often, there is no requirement that the state program (e.g., Medicaid) be repaid from the trust assets when the child dies or upon the trust’s termination.

Established during lifetime of the grantor. Trusts established during life offer opportunities for clients to incorporate the trust into their overall estate and financial plans. For example, lifetime gifting opportunities or the purchase of life insurance may play a role.

Established at death. Special needs trusts may also be funded through the use of a testamentary trust or a revocable trust, in which the trust takes effect upon the grantor’s death. This approach offers greater flexibility for those clients who wish to remain in control of assets during their lifetime.

1) The general rules. Although there are many other considerations and state rules vary, three general rules apply so that trust assets will not interfere with the beneficiary’s benefits:

• The trust must be irrevocable.
• The trustee should be given the authority to make trust distributions at the trustee’s complete discretion.
• Distributions of trust assets must be restricted to specific purposes, so the beneficiary is protected from becoming ineligible for benefits.

2) The trustee. Remember, the trustee has complete discretion in making distributions. The trustee may be a family member, an unrelated party, or a professional trustee. Often, a family member is chosen, as these individuals often have better insight into the beneficiary’s personal circumstances and needs; however, a corporate trustee is often in a better position to manage the regulatory, tax and governmental requirements.

Keep the following questions in mind when it comes to helping your client choose a trustee:

• Does the trustee understand government program requirements and the effect program distributions may have on benefits?
• Is this person financially savvy and does he or she have knowledge of the beneficiary’s specific needs?
• Are there any potential conflicts that may arise from the trustee’s relationship with the beneficiary? For example, is the trustee a remainder beneficiary of the trust?

3) Distribution provisions. The rules regarding how income is treated vary depending on the program and the purpose for the distribution. It’s important to carefully define the guidelines for trust distributions.

4) Coordination of family members. To start, family members should understand the trust’s purpose and how the assets should be spent. This does not mean that relatives with good intentions should leave an inheritance outright to a special needs family member. In fact, this type of generous offering may actually undo your client’s planning or cause further complications. For those who have a better understanding, however, planning for a special needs family member can be appropriately incorporated into their own planning.

5) Beneficiary designations. Beneficiary designations on retirement plans and life insurance should be part of the overall plan review. Although naming a special needs trust as the beneficiary of a retirement plan can accelerate distributions and income tax, the trust objectives may outweigh this factor.

6) Funding. Life insurance may be a good solution for a special needs trust. The receipt of life insurance proceeds by a trust is generally not subject to income tax (or estate tax if included as part of an irrevocable trust established during life). The liquidity provides the trustee with flexibility for investment and management of the assets. Consider partnering with an attorney to help explore how specific planning can be used most effectively for the care of the special needs family member.

In some cases, your client’s adult child with special needs will lack the ability to make informed medical decisions or give consent to the release of confidential medical information. A health care power of attorney that includes HIPAA release information can authorize the release of confidential medical information that is helpful in making medical or financial decisions.

Plans should be in place to designate a caregiver in the event that your client is unable to provide care. State law generally allows the nomination of a guardian, allowing the client to name a desired individual for the court’s appointment. (The client also has the ability to discourage the appointment of an individual he or she believes would not be in the best position to manage the family member’s affairs.)

For some clients, the costs of professional advice or potential administrative tasks may scare them away from planning for their special needs family member. But it is only through planning in advance for future needs that your clients can examine the assets and get the complete view when it comes to identifying planning opportunities.

What are your clients’ most common concerns when it comes to special needs planning? Have you incorporated the special needs trust into your planning strategy? Please share your thoughts with us below.

Commonwealth Financial Network^® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.