Disabilities seem so common today. It seems almost every family is faced with the challenges of helping a child with special needs. Unfortunately, few parents are fully aware of all the risks they’re taking by not making special provisions for their special needs child.
By inheriting his/her share of the parents’ assets, the child will forever be disqualified from receiving government benefits like group housing, vocational training, and Medicaid or Medi-Cal. The fact is only by structuring the child’s inheritance as a special needs trust can the parents be sure their child will have both the necessary resources and the needed government benefits – for the remainder of his/her life.
Today, nearly 57 million Americans have disabilities, according to the U.S. Census Bureau Reports issued July 25th. About half of them will require costly care throughout their lifetimes.
A special needs trust can provide income for disabled beneficiaries’ future medical expenses, while maintaining eligibility for Supplemental Security Income (SSI), Medicaid, and other government benefits.
While 69% of families say they’re very concerned about providing lifetime care for their dependents with special needs, only around 12% have set up a special needs trust.
Providing income can be tricky. Government benefits phase out at very low levels. For example, SSI is available to individuals with less than $2,000 in assets – yes, you read that correctly – or couples with less than $3,000! Families who give their disabled relatives assets, either while alive or as part of their estates, can easily also make sure the child is no longer eligible for benefits.
Some issues to consider:
- If you named a family member to act as a trustee to administer the trust: what happens if something should happen to your trustee after you’re gone. Who steps in then? Is their a void – or a new trustee who is unqualified, or worse, untrustworthy?
- How will you fund the trust to provide the necessary assets to provide needed income for your child? What if something happens to you before the trust can be fully funded? Or, is this a gamble you’re willing to take with your child’s future?
- Who will manage the trust to help ensure the assets will be arranged responsibly? Will uncle Joe or aunt Betty be making it up as they go along – or worse – be watching Cramer for stock tips?
Administration: you want a qualified trustee to administer trust provisions – one that is independent, regulated, is legally required to function as a fiduciary, and – important – doesn’t die. Read on.
Asset custody: custody should be independent of administration. The assets reside should reside at an independent third party custodian. The trustee can administer the trust provisions, but the trustee does not have possession of the trust assets.
Asset management: asset management should be independent of administration and custody. Asset management is provided by an independent third party registered investment advisor, also regulated and legally required to function as a fiduciary. The advisor does not have access to the beneficiaries’ funds which reside at an independent custodian which can disburse funds only in compliance with the trustee’s instructions which are subject to regulatory oversight and fiduciary liability. It would also help if the investment advisor is a CERTIFIED FINANCIAL PLANNER® professional.
Quick review: common pitfalls to avoid
1. The wrong trustee
It’s common to name a relative as trustee, but what if they pass away or are unable to serve? Worse—what if they mean well but aren’t equipped to handle the legal, tax, and benefit rules?
2. Underfunding the trust
If you die before the trust is funded—or fund it too little—it may not cover your loved one’s lifetime needs. This isn’t something to “figure out later.”
3. Amateur money management
Aunt Betty and Uncle Joe might be wonderful people, but investing trust assets based on TV stock tips isn’t a sound plan.
Steps to start planning
Here are some steps you can take to protect your children:
- Name a guardian: Do this before your special needs child reaches adulthood so this person can continue to make decisions after the child reaches age 21. Most families also name a successor guardian, often a sibling, to take on these responsibilities after the parents pass away.
- Write a will: The will should name a successor guardian for the disabled child, in addition to providing for distribution of the estate.
- Decide where your child will live after you’re gone: the child will need housing and care.
- Identify a trustee: The trustee will be in charge of managing and distributing assets held in the trust. A corporate trustee can ensure that distributions cannot be considered as income to the beneficiary and conform to public benefit programs and laws. Solutions like direct bill-pay, credit cards, debit cards, and budgets can be set up to ensure the beneficiaries’ needs are met.
- Funding: begin setting aside money. Do you have a plan make sure the trust is fully funded? Even moderately wealthy families can benefit- and funding can come from a variety of sources. How much will you need to fully fund a trust to meet your special needs child’s requirements for life at different inflation rates?
- Write a letter of intent: A Letter of Intent (LOI) provides critical caregiving instructions to future guardians, trustees, and advocates of a special needs beneficiary.
- Set up a special needs trust: these specialized vehicles provide the mechanism for meeting the disabled beneficiaries’ supplemental expenses. Where will your trust be cited? You may want to avoid a high-tax state.
How to eat an elephant: one bite at a time.
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Jim
