- Have a family conversation to clarify roles and wishes.
- Engage legal and estate planning professionals.
- Consider creating a trust for the benefit of the beneficiaries for as long as they live.
- Build some flexibility into your plan, as needs may change over time.
- Keep your plan current by reviewing it every 3 to 5 years or when circumstances change.
A sound, up-to-date estate plan is important for virtually every adult—but it’s absolutely essential for people who have dependents with special needs. "Many special needs children will be financially dependent on others their entire lives," says Timothy Bender, Vice President, Advanced Planning for Fidelity Wealth Planning and Personal Trust. "It's crucial to have a plan in place that protects the long-term financial well being of these dependents."
Here are some strategies you should consider if you have a family member with special needs.
Clarify your goals
When creating or reviewing your estate plan, start by identifying what you’re trying to accomplish as a family. Hold conversations with appropriate family members, as well as professionals such as financial advisors, attorneys, and physicians, to determine how you want to divide the estate among your heirs. “Some families may want to leave more money for the benefit of a special needs child than for the benefit of other children; other families may decide it makes sense to leave less, because that child receives benefits from a settlement or Social Security; and others might want to make inheritances as equal as possible,” says Bender. “Talking through those kinds of issues is the first step.”
Also discuss what care will be necessary for your special needs dependents, how care will be provided, and who will take responsibility for overseeing care.
Consider establishing a trust
Bender recommends speaking with legal and estate planning professionals regarding the creation of a trust that could provide for special needs dependents for as long as they live, rather than leaving money directly to the dependent or another family member.
"Many people with special needs have cognitive impairments that keep them from being able to manage money well," says Bender. "What’s more, leaving an inheritance to a special needs dependent may put them at risk of losing eligibility for government benefits."
Some families simply leave extra assets for a sibling or other loved one to care for the dependent. That’s unwise, Bender warns. Such a commitment can create unwanted moral obligations or financial problems. "It's impossible to prepare for every contingency," Bender says. "Say a special needs child has a brother who's very reliable and agrees to take on added responsibilities. Divorce, job loss, or unexpected death can derail even the best-intentioned plans."
A trust provides a vehicle in which a family can set aside funds specifically for the care of the special needs dependent. The right type of trust depends largely on the anticipated size of the grantor's estate.
Many individuals with special needs are currently eligible for up to $750 per month in federal Supplemental Security Income (SSI)*, and also may qualify for other need-based federal, state, or local programs. Trusts set up specifically for special needs dependents can help ensure that their inheritance doesn’t jeopardize eligibility for those payments. Special needs trusts limit how the money in them can be used, however, so affluent families may opt for a general discretionary trust, which allows for greater flexibility and imposes fewer limits on disbursements.
These trust types are generally irrevocable. Although it is possible to establish a trust that allows assets to be used for current expenses, most trusts are funded upon the death of the person establishing the trust. As always, consult with your attorney regarding your specific circumstances and applicable requirements.
Different kinds of trusts include:
- Trusts created with the dependent’s assets. This type of trust is often referred to as a “first-party special needs trust,” and is designed for special needs dependents who come into money through an inheritance, a settlement, or other unexpected means, and are under age 65. They are designed to ensure that the money doesn't jeopardize means-tested eligibility for government benefits. However, under the terms of these types of trusts, when the dependent dies, the state Medicaid agency receives any money left in the trust for any support the state provided to the dependent.
- Trusts created with assets from a third party, such as parents or grandparents. This type of trust is often referred to as a “third-party special needs trust,” and is created by someone who wants to leave money for a special needs dependent but doesn't want that person to lose out on government benefits. The trust can be established by a will or created during the benefactor’s lifetime. The creators of the trust appoint a trustee who has general discretion over it. The trustee cannot distribute money directly to the dependent, but can pay for certain items and services not covered by the dependent's monthly SSI income. Upon the death of the dependent, whatever assets are left in the trust can be distributed according to the creator's wishes as specified in the terms of the trust.
- Pooled special needs trusts. This classification allows nonprofit organizations to set up and manage first-party and/or third-party pooled special needs trusts for people with special needs. There is no cost (or only nominal cost) to set up or administer this kind of trust, and no tax return is required for it, making this an easy and inexpensive way to set aside money for a special needs dependent. However, transferring money out of this trust can result in certain penalties. Disbursements from the trust that do not benefit the special needs individual may be subject to a penalty, while some US states penalize transfers of assets into the trust, depending on the age of the special needs individual. When the dependent dies, the remainder of the money in the trust stays in the fund to help other special needs people who are cared for by the nonprofit organization; or, some “third party” pooled special needs trusts allow the remainder to pass to designated family members. For a list of nonprofits that offer this option, visit the Academy of Special Needs Planners website.
Tip: The restrictions imposed by the trusts listed above may prevent the flexibility a family desires in meeting the needs of a dependent. In that case, a family may choose to create a general discretionary trust. General discretionary trusts typically disqualify the special needs dependent from government benefits, but let trustees use the money in any way that benefits the trust’s beneficiary. (Again, always consider consulting an attorney in order to address your specific circumstances.)
Update your plan periodically
All estate plans need to evolve over time to keep pace with changes in people’s lives and financial situations. The stakes for staying up-to-date are especially high for families with special needs dependents. Dependents’ conditions often are not static. Some dependents' condition may become more or less acute as they grow older, and the level of help they need can fluctuate over time. Speak with your attorney or estate planning specialist about how to build flexibility into your plan through a trust or otherwise, based on your specific situation.
In addition, to make sure your plan stays current, review it every 3 to 5 years, or whenever your life or your family changes in a major way. That way you can be confident that your loved ones will be cared for when you’re no longer here to look after them financially.
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Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
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