In honor of “Developmental Disabilities Awareness Month,” proclaimed by President Ronald Reagan in March 1987, this article examines the unique planning requirements of families who have loved ones with access and functional needs (or “AFN”), often referred to as “special needs planning” by estate planning professionals. Understanding the pitfalls associated with such planning is a must for all who assist families with children, grandchildren or other loved ones (such as parents) with AFN.
Tip #1: Beneficiaries with AFN require special planning.
As a society, we have come a long way since 1987 regarding stereotyping people with AFN and the correlating estate planning requirements, but there remain numerous misconceptions that often result in costly mistakes when planning for such beneficiaries. These misperceptions may become even more costly in the future as fiscal pressures cause state and federal governments to cut back funding for people with AFN. Thus, it is critically important that loved ones proactively and properly plan for these individuals.
It is important not to make the mistakes below that could cause beneficiaries with AFN to rely exclusively on shrinking government funds, or that place them in unduly restrictive or ineffective structures.
Tip #2: Don’t disinherit the beneficiary with AFN.
Many persons with access and functional needs receive Supplemental Security Income (“SSI”), Medicaid or other government benefits that provide basic food, shelter and/or medical care. The loved ones of the beneficiaries with AFN may have been advised to disinherit them – beneficiaries who need their help most – to protect the public benefits. But these benefits rarely provide more than basic needs. And this solution (which normally involves leaving the inheritance to another sibling) does not allow loved ones to help their beneficiaries with AFN after they themselves become incapacitated or die. The best solution is for loved ones to create a special needs trust to hold the inheritance of a beneficiary with AFN. A properly drafted special needs trust will protect public benefits such a beneficiary may be receiving, and it will provide for proper care of that individual throughout their lifetime.
Tip #3: Don’t rely on siblings to use their money for the benefit of a beneficiary with AFN.
Many family members rely on their other children to provide, from their own inheritances, for a child with access and functional needs. This can be a very temporary solution, such as during a brief incapacity, if the other children are financially secure and have money to spare. However, it is not a solution that will protect a child with AFN after the death of the parents or when siblings have their own expenses and financial priorities.
For example, what if an inheriting sibling divorces or loses a lawsuit? His or her spouse (or a judgment creditor) may be entitled to half of the sibling’s inheritance, and will likely not care for the sibling with AFN. What if the inheriting sibling dies or becomes incapacitated while the sibling with AFN is still living? Will his or her heirs care for the sibling with AFN as thoughtfully and completely as the inheriting sibling did?
Siblings of a child with AFN often feel a great responsibility for that sibling and have felt so all of their lives. When parents provide clear instructions and a helpful structure, they lessen the burden on all their children and support a loving and involved relationship among them.
Tip #4: Procrastination can be especially costly for beneficiaries with AFN.
None of us know when we may die or become incapacitated. It is important for loved ones with a beneficiary with access and functional needs to plan early, just as they should for other dependents such as minor children. However, unlike most other beneficiaries, beneficiaries with AFN may never be able to compensate for a failure to plan. Minor beneficiaries without AFN can obtain more resources as they reach adulthood and can work to meet essential needs, but beneficiaries with AFN may never have access to that same opportunity.
Tip #5: Don’t ignore a beneficiary with AFN when planning.
Planning that is not designed with the beneficiary’s access and functional needs in mind will probably render the beneficiary ineligible for essential government benefits. A properly designed special needs trust promotes the comfort and happiness of the beneficiary with AFN without sacrificing eligibility.
Distributions from a special needs trust can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation and essential dietary needs. If the trust is sufficiently funded, the trust beneficiary also can receive funds to be used for quality-of-life-enhancing expenses: the types of benefits families currently provide to their child or other beneficiary with AFN. However, the rules often change on the types of expenses that can be paid for by a special needs trust. Therefore it is important to continually seek advice when drafting or administering a special needs trust.
Tip #6: A special needs trust does not have to be inflexible.
Some special needs trusts are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the beneficiary’s public benefits, many trusts are not customized to the particular beneficiary’s needs. Thus the beneficiary fails to receive the benefits that the parents or others provide while they were alive.
Another frequent mistake occurs when the special needs trust includes a pay-back provision rather than allowing the remainder of the trust to go to others upon the death of the special needs trust beneficiary. While these pay-back provisions are necessary in certain types of special needs trusts, an attorney who understands this area and knows the difference can save family members and loved ones hundreds of thousands of dollars, or more.
Tip #7: Exercise great caution in selecting a trustee.
Loved ones or family members can manage the special needs trust while alive and well if they are willing to serve and have proper training and guidance. Once the family member or loved one is no longer able to serve as trustee, they can choose who will serve according to the instructions provided in the trust. Families or loved ones who create a special needs trust may choose a team of advisors and/or a professional trustee to serve. Whoever they choose, it is crucial that the trustee is financially savvy, well-organized and of course, ethical.
Tip #8: Invite others to contribute to the special needs trust.
A key benefit of creating a special needs trust now is that the beneficiary’s extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the special needs trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the special needs trust as a beneficiary of life insurance or retirement benefits. Unfortunately, many extended family members may not be aware that a trust exists, or that they could contribute money to the special needs trust now or as an inheritance later.
Tip #9: This is an ever-changing area of the law.
The rules applicable to special needs trusts and planning are constantly changing. For example, the Affordable Care Act now makes private health insurance an option for people with access and functional needs. However, private insurance will still not cover the costs of long-term care and other services or equipment necessary for a loved one with AFN. Thus, even if the family chooses private insurance, the beneficiary with AFN may still require Medicaid eligibility, necessitating a special needs trust. Please contact us if you have questions about these options.
Planning for a beneficiary with access and functional requires particular care and knowledge on the part of the planning team. A properly drafted and funded special needs trust can ensure that a beneficiary with AFN has sufficient assets to care for him or her, in a manner intended by loved ones, throughout the beneficiary’s lifetime. Please contact us if you have any questions regarding planning for special needs beneficiaries.
This article provides general information about estate planning for the convenience of the readers. The content of this article is not intended to establish, and its use does not establish, an attorney-client relationship between the author and any reader. Information contained in the article is not legal advice.