Planning For the Disabled Child With a Supplemental Needs Trust

Since 1993 it has been public policy in New York State to allow parents (or other relatives) of a disabled child to set up a trust for their inheritance which will not disqualify them from government benefits, such as Social Security and Medicaid. The reasoning behind these supplemental needs trusts is simple – prior to the protection now afforded by these trusts, parents would simply disinherit their disabled children rather than see them lose their benefits. Since the state wasn’t getting the inheritance monies anyway, why not allow it to go to the disabled child for his or her extra needs, above and beyond what the state supplies, such as sundries, clothing, meals, vacations, over-the-counter medicines, upgraded medical procedures, reading material, recreation, improved housing, etc.

These trusts, however, offer traps for the unwary. Since payments to the child will generally reduce their SSI payments dollar for dollar, trustees of such trusts should be advised to make payments directly to the providers of goods and services. Preserving SSI benefits is crucial since eligibility for SSI determines eligibility for Medicaid. In other words, if SSI is lost the recipient also loses their Medicaid benefits. In addition, any benefits previously paid by Medicaid may be recovered. As such, one also has to be mindful of bequests from well-meaning grandparents.

Distributions from the trust to the beneficiary should be “in kind” rather than in cash. For example, the trust may own items such as furniture and allow the beneficiary child the use of them. In addition, the supplemental needs trust must be carefully drafted so that it only allows payments for any benefits over and above what the government provides, not only now but also in the future. The child may not control or have direct access to any portion of the trust.

A major issue for parents today is the increased life expectancy of their disabled child. With major advances in medical care, many disabled children, who would have in earlier days predeceased their parents, are now surviving them. In order to solve this problem, parents often make the planning error of leaving a disproportionate share of the estate to the disabled child. This can engender hard feelings in siblings who, although agreeable to such an arrangement initially, may find themselves in need of funds later on and resentful of the uneven distribution in favor of the disabled child. The surviving siblings are often the only support network available for the special needs child so that it is all the more important to keep peace and harmony in the family.

Often, an analysis with the estate planning attorney will reveal that the income from an equal division of the estate will, in fact, be sufficient to provide for the disabled child’s needs. If such is not the case, “second-to-die” insurance may be purchased to provide for any additional funds needed. The policies are written over two lives, those of both parents. Since the insurance company only has to pay when the second parent dies (i.e., when the funds are needed) the premiums are significantly lower than on a single life policy.

Some parents, feeling the family is close enough, think that they can simply leave the inheritance to a brother or sister who will then take care of the disabled sibling. This offers no protection to the disabled child in the event the sibling runs into financial difficulties, has a divorce or predeceases the disabled child. The supplemental needs trust allows the sibling, as trustee, to manage the assets for the benefit of the disabled child while providing complete protection for the funds and the naming of back-up trustees to continue the trust in the event of the death or disability of the initial trustee. Remember, these trusts may have to last for many years.

With the complexity of modern trust administration, many parents are choosing both a personal and a professional trustee, so that the family member can provide the personal input while having the professional trustee handle the administrative items, such as monitoring investments and preparing tax returns.

It is also a good idea to review beneficiary designations on IRA’s and 401(k)’s as well as on annuities and insurance policies so that the disabled child’s supplemental needs trust is named as the beneficiary rather than the child themselves. Watch out for simple designations such as “my spouse first and my children second”.

Another key issue is continuity of care for the child upon the surviving parent’s death. Revocable living trusts are often used as the estate plan of choice since the trustee may use and distribute assets for the benefit of the disabled child immediately after the parent’s death, unlike in the case of a will, which must first be probated, a court proceeding to determine its validity. These proceedings may tie up the estate assets for many months or even years in some cases.

Not to be overlooked in planning for the disabled child is the “Letter of Intent” or Personal Needs Notebook, where the parents should provide the following information to the trustees

(1) the nature of the child’s disability

(2) emotional and financial care provided by the family

(3) persons involved with the child

(4) the child’s capabilities and limitations

(5) their likes and dislikes

(6) their behavioral quirks and nuances

(7) their daily routine, and

(8) how they act with other people and in other places when the parents are not around.

One final word of caution. Where a disabled child is involved, it is of greater importance that funds be available when needed. As such, long-term care insurance for the parents should be arranged so that the money the family is depending on to support the disabled child is not lost for the parents’ potential nursing home expenses.