Taking Special Needs Into Account When Planning Your Estate

Third-party special needs trusts sometimes referred to as supplemental needs trusts are ways for parents of children with mental and physical disabilities to plan for the future. This type of trust will receive assets from you or another benefactor expressly for that person with a disability.

Goals include:

• Leaving funds for your child’s or elderly family member’s benefit without causing the loss of the public benefits
• Ensuring these funds are well managed
• Ensuring other family members are not overburdened caring for a disabled sibling or older adult and that the task falls relatively evenly among siblings or family members
• Fair asset distribution of your estate among your disabled child or older adults and your other children
• Ensuring there is enough money to meet the needs of your disabled child or adult

Often parents will leave additional assets to siblings and nothing to the disabled child or older adult in the hope that the sibling will adequately manage the money while retaining government benefits and providing overall care and decision making for the special needs person. This tactic is not the wisest of approaches for several reasons. Government programs are often more supplemental aid to a disabled person than a complete solution. Without monies set up correctly in a trust, public benefits programs are most often inadequate. Also, what is working well today, may change tomorrow as public benefits programs and individual circumstances change. Finally, relying on other children to care for the special needs family member puts an undue burden on them, potentially straining family relations. Resentments can build, and sometimes decision-making is not in the best interest of the special needs family member.

Understanding the SECURE Act for Special Needs Planning

The Setting Every Community Up for Retirement Enhancement (SECURE) Act became effective as of January 1, 2020. This Act affects special needs planning both for third-party supplemental needs trusts and first-party special needs trusts.

SECURE Act does not change the goal or general planning method related to children or adults with a disability and planning with retirement assets. The preferred method is a properly drafted third-party special needs trust with a qualified designated beneficiary (particularly an accumulation trust). This trust provides asset management that retains public benefits and provides a lifetime stretch of a traditional retirement account or IRA benefits for the trust beneficiary.

The bad news about the SECURE Act is the new ten-year payout of retirement assets after the account owner’s death resulting in accelerating income tax taxation on the retirement assets. Only a qualified EDB, eligible designated beneficiary, can take advantage of a longer than ten-year payout rule. Therefore unless an exception applies, traditional accounts or IRAs are to be paid out within ten years to the designated beneficiary or within five years if there is no designated beneficiary.

The EDB is a new class of beneficiaries and is an exception category for individuals still permitted to use a lifetime payout. Qualifying EDBs under SECURE are:

• Surviving spouse
• Minor children of the participant
• Disabled beneficiaries
• Chronically ill individuals
• A beneficiary less than ten years younger than the participant

These exceptions permit the lifetime payout, resulting in less income tax realized by the distributions of retirement assets, as long as the beneficiary’s life expectancy is no longer than the default ten-year rule under SECURE.

There are still unanswered questions about SECURE. Can remainder beneficiaries of an adequately drafted third party special needs trust be disregarded when determining the applicable distribution period for an EDB during the EDBs lifetime? If an EDB is a minor, can proof of an additional EDB category such as disability or chronic illness be provided before the expiration of the rules related to minors so that the EDB status can continue past minor status? Said another way, can a trust for minors as a beneficiary continue without losing EDB status and requiring the ten-year payout? Finally, is it permissible to certify disability by eligibility for Supplemental Security Income (SSI), Social Security Disability Benefits (SSDI), or long-term care Medicaid, or a separate disability certification process such as exists for ABLE accounts?

The Value of Working With an Elder Law Attorney When Engaging in Special Needs Planning

To understand the answers to these questions and more, contact your elder law estate planning attorney with expertise in special needs. They can help you map out benefits that can include SSDI, Medicare, Medicaid, food stamps, and more, taking into account the needs of your particular child and the services they may require throughout their life, and the associated costs.

Your attorney can also help you identify a circle of support that is available to your child. Are siblings able to help? Who is the best choice as trustee for a special needs trust? This individual will have sole discretion to disburse funds for the well-being of your special needs child which is a critical designation. Your attorney should have strong ties with therapists, care managers, and other service providers in your community that can address upcoming issues that may be unknown to you. Taking the first steps towards long-term special needs planning is the best way to ensure your loved one with disabilities can remain socially and financially secure. We hope you found this article helpful. If you have questions or would like to discuss a personal legal matter, please contact us today at (408) 371-6000 to schedule a free consultation.