Your Estate Matters
Special-needs trust helps secure future for disabled child
PARENTS of children with disabilities are very concerned about planning for their future. Parents know that there will come a time when the parents will no longer be around to take care of the child they love, and they understand that there is no perfect replacement for parents' love and care. Some planning methods, though, are better than others. Consider this family's situation:
John and Lei are considering estate planning. They have three adult children: Joe, Susan and Jim.
Joe and Susan are independent and doing well. Jim is mentally challenged and is living with John and Lei.
Caring for Jim is very important to John and Lei. They understand that Jim will never be able to live independently or support himself. He will need a home, income and a support system provided for him for the rest of his life. They are thinking of leaving all their assets to Joe and Susan since Joe and Susan have promised to take care of Jim. Is this a good solution?
Actually, this solution has serious problems. No assets are legally protected for Jim and he may live a long time. Joe and Susan may not live up to their commitment. This could happen with the best of intentions should Joe or Susan have financial problems, become disabled themselves, get divorced or die. Jim's security is imperiled.
JOHN AND LEI are also considering leaving some assets to Jim outright. Is this a good solution for caring for Jim?
Unfortunately, this solution is also problematic. Jim is probably receiving needs-based income under the Social Security system and getting needs-based medical care and other support from the state. If Jim has what the state considers as countable assets of over $2,000, he will lose these benefits until the assets are used up. He might also be influenced by unsavory characters and lose his assets. So again, Jim's security is imperiled.
What is a good solution?
A good solution is the creation of a special-needs trust (SNT) for Jim. This trust can be created as a stand-alone trust while John and Lei are alive, or it can be created as part of John's and Lei's testamentary distribution plan when both parents die. A plan with such a trust does not rely on the moral commitments of others to be successful.
The SNT would be designed to hold Jim's inheritance. It needs to be carefully drafted so that the assets in the trust can be used to enhance Jim's lifestyle but not cause him to lose his needs-based benefits. For example, in Hawaii, the state Medicaid system pays very little in the way of dental care, however, the funds in the SNT can be used to pay for Jim's dental care. Also, the funds in the SNT can be used to take Jim on a trip to Disneyland or other quality-of-life excursions. Neither of these distributions will reduce Jim's needs- based benefits.
The stand alone SNT is an especially good idea if there are other family members or friends who want to gift or bequeath assets for Jim's benefit. They can be provided the information on how to transfer assets to the stand alone SNT.
An SNT can be created by anyone for anyone else. Grandparents can set up an SNT for grandchildren. A sibling can set up an SNT for another sibling. A child can set up an SNT for a parent. A friend can create an SNT for another friend.
Major changes to the Medicaid law were made under the Deficit Reduction Act of 2005 that was signed into law February 8, 2006. There were technical corrections made to this law recently. However, none of the changes focused on SNTs as discussed in this article.
REMEMBER, every state has laws and Medicaid rules that apply to SNTs and these laws and rules vary from state to state. In creating an SNT, it's important that it conform to the laws and rules for SNTs that apply in the state of residence of the person with special needs.
Attorneys Judith Lee Sterling and Michelle H. Tucker, of Sterling & Tucker, can be reached through www.sterlingandtucker.com
or by calling (808) 531-5391.