If you’re a parent who has taken the time and energy to create an estate plan, you should be commended for your initiative and perseverance for ensuring your children and grandchildren are properly cared for when you are gone. If you have not yet created an estate plan, doing so could be one of the most important actions you can take on behalf of your children’s future well being. A properly drafted estate plan designates who will care for your minor children upon your death, as well as providing for the smooth transfer of wealth to your children. Many parents assume that making sure a child is financially secure after they are gone means leaving the assets outright to the children. For many reasons, such as a child’s inability to manage finances, outright distribution of your assets to your children may not be the most prudent option. This becomes especially true if any of the beneficiaries of your trust estate have, or develop in the future, special needs and require the assistance of government aid.
There are generally two types of government assistance: Employment-based assistance and need -based assistance. Employment-based assistance is those benefits available to an applicant based upon the work history of the applicant or a close relative. Within this category you would find Social Security and Medicare. In contrast, need-based assistance is offered, generally, to lower-income applicants only. Need-based assistance, such as Supplemental Security Income, or “SSI”, and Medicaid, has stringent income and resource requirements for receiving financial assistance. Leaving assets outright to a special needs child could render them ineligible to receive otherwise valuable government assistance until those assets are exhausted. But what is a parent to do to avoid this result?
One option is to disinherit the special needs child completely, thereby allowing the child to receive aid from the government they would otherwise not be able to receive with an inheritance. Although the parents could instruct their other children to care for the special needs child, there is no guarantee that this will be done. Additionally, there is no assurance that the government program will continue in existence or will provide the expected level of assistance. Finally, and possibly most significantly, the psychological effects of disinheriting the child could be devastating to the child and the parents during their lifetimes. Therefore, for most parents this option is not an option at all.
A second and more viable option for fulfilling a parent’s desire to care for a special needs child without interfering with his or her ability to receive government assistance is through the use of a properly drafted trust. Special provisions can be included in your trust limiting the child’s access to the trust assets and, hence, the inheritance’s effects upon assistance eligibility.
As any mandatory distributions from a trust will be taken into consideration in determining a child’s eligibility for government assistance, the Trustee of your trust should instead be given full discretion to distribute income and/or principal for the benefit of a special needs beneficiary. In this manner, only those assets actually distributed are counted towards qualification. If the trustee does decide to distribute trust assets for the benefit of a special needs child, it is important that the trust document limit such distributions to only supplemental purposes. Distributions for the support of the child, such as for food, clothing, shelter or routine medical care, will be considered when determining the child’s eligibility for aid. Therefore, distributions for the beneficiary’s support should be prohibited. It is important to state clearly your intention that distributions supplement, but not diminish, any form of government or private support that a beneficiary is then receiving or becomes eligible to receive. Although this may seem to limit distributions drastically, your child still may receive trust assets for his or her comfort and general welfare.
Benefit planning is a highly specialized area of the law. The rules and requirements vary from state to state and failing to be aware of your state’s law can severely hinder your child’s chances of receiving government assistance. Some states have introduced legislation allowing trust assets to be accessed where certain needs of a beneficiary are not being met, unless the trust clearly states that the statute is inapplicable. Therefore, it is imperative that you consult with a qualified estate planning attorney to discuss your particular needs and to incorporate any unique provisions into your trust required by your state. Failing to include special needs provisions in your estate plan, or failing to have them drafted by a knowledgeable estate planning attorney specializing in benefits planning, could result in the loss of valuable government assistance for your special needs beneficiary.
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Duffy Law Office is a member of the American Academy of Estate Planning Attorneys.