ESTATE PLANNING FOR FAMILIES
WITH A DISABLED CHILD
INTRODUCTION
 | The focus of this article is on estate planning for families who want to provide for a disabled child (or another disabled family member), but whose wealth is not likely to be sufficient by itself to pay for all of the child's lifetime support, and who thus want the child to receive all public support to which he or she may be entitled. |
| "Disability" for purposes of this article refers to any physical or mental condition, such as mental retardation, that is likely to be long-term and will seriously affect the child's ability to be self-supporting. Inability to be self-supporting includes both: |
Personal Care Needs. The practical question is: What will happen when the parents can no longer take care of the disabled child's personal and health-care needs?
Property Management and Protection. Here the question is: Who will handle the disabled child's financial affairs, including their receipt of public benefits and resources, when the parents are no longer able to do so?
| If no planning is done in either situation, a Court-supervised guardianship may be the only solution. However, guardianships should be avoided if at all possible. |
| Key planning goals for parents will thus involve maintaining the disabled child’s eligibility for need-based state and federal programs, such as SSI and Medical Assistance, and protecting the family’s property from government claims for reimbursement of such benefits. |
DON'T OVERLOOK ESTATE PLANNING FOR THE REST OF THE FAMILY
| Planning for a disabled child should properly be done within the context of the family's overall estate plan. Such a plan should consider: |
Lifetime needs of parents, including both property protection in the event they become incapacitated, and health-care powers of attorney and end-of-life directives.
Death-time planning for the tax-efficient transfer of property to the next generation.
| Once the overall estate plan has been designed, then specific planning for the disabled child should be addressed. |
OPTIONS FOR PROVIDING FOR A DISABLED CHILD
| DIRECT OUTRIGHT TRANSFER TO CHILD |
This option will be the de facto result if the parent dies without a Will, since the parent's property will then pass outright under state intestacy law. The same result will occur if the parent’s Will makes a direct transfer to the disabled child.
This is an inadvisable solution, even if the child may be marginally capable of managing the bequest.
Because the child will be the owner of the bequest, the property will be immediately vulnerable to reimbursement claims by the state. Direct ownership may also render the child prospectively ineligible for needs-based government assistance programs until the bequest has been totally spent.
An outright transfer thus will likely benefit only the state, not the child.
| INDIRECT TRANSFER TO CHILD USING A THIRD PARTY |
The "indirect transfer" technique involves transferring property intended for the disabled child to a third party, such as a sibling or other family member, with the informal understanding that the third party will use the property to provide for the needs of the disabled child.
This in an inherently risky maneuver, however, because there can be no assurance that the disabled child will ultimately receive the property. Since by definition the disabled child can have no legal claim to the assets, the bequest will be treated as the property of the third party.
Even if the third party is totally trustworthy, there is the inevitable risk that he or she may die, be divorced, acquire a creditor as part of a lawsuit, or go into bankruptcy. In any of these events, the property will likely be involuntarily lost.
| TRANSFER TO A TRUST FOR THE DISABLED CHILD |
While a trust in theory may protect the property for the disabled child, not all trusts afford the same degree of protection. In the context of estate planning for a disabled child, these differences can become crucial. Choices among trust models include:
MANDATORY DISTRIBUTION TRUST. This type of trust would require the trustee to pay the trust’s income or principal, or both, to the disabled child, with no discretion to retain the property inside the trust.
A mandatory distribution-type of trust would be inadvisable for a disabled child, since it does not allow the Trustee to withhold making distributions if they are not needed by the child. The income and/or principal would be treated as an available resource to the child, and would disqualify the child from all needs-based government programs until the trust fund was exhausted.
SUPPORT TRUST. A trust of this kind directs the trustee to make distributions of income and/or principal as needed to provide for the disabled child’s "support" or "maintenance." Although almost all trusts for children routinely contain such terms, they are not recommended for a trust intended to benefit a disabled child, since these very words will likely make the trust an available resource and also disqualify the child from needs-based government programs.
DISCRETIONARY SUPPLEMENTAL NEEDS TRUST. This kind of trust directs the trustee to make distributions for the child's benefit, but it allows the trustee complete discretion as to the amount and timing of such distributions. The stated purpose of this trust is that trust property should only supplement -- but not supplant -- the public benefits for which the child is eligible.
Because the trust does not mandate distributions, or even establish a fixed standard for distributions (e.g., "support" or "maintenance"), it will not be treated as an available resource for government-program eligibility purposes.
BEST CHOICE: DISCRETIONARY SUPPLEMENTAL NEEDS TRUST
Comparing the three trust models, the Discretionary Supplemental Needs Trust will best shield family assets intended to benefit the disabled child from state claims for reimbursement, while at the same time allowing the trustee to provide for any needs of the child that are not covered by government programs.
Pennsylvania courts have consistently upheld such Discretionary Supplemental Needs Trust from state attack. The courts have ruled that a discretionary trust, where the trust property is clearly intended only to supplement and not supplant public benefits, does not count as a resource of the disabled beneficiary, and the trust is not liable to repay public benefits provided to the beneficiary.
DESIGNING AND ADMINISTERING A DISCRETIONARY
SUPPLEMENTAL NEEDS TRUST FOR A DISABLED CHILD
A Discretionary Supplemental Needs Trust can be created either in a parent’s Will or a Lifetime Trust. That choice will depend on the parent’s overall estate planning goals.
Using a lifetime trust has certain advantages. For instance, it can ensure that the disabled child will begin to receive benefits at the time parental support stops, whether that occurs upon the parent's death or earlier in case of the parent's lifetime incapacity.
| Selection of Trustee is Crucial |
Who should be named as the trustee or trustees of a Discretionary Supplemental Needs Trust? By definition, the parents will not be available to serve, so someone else will have to be named. Special talents are required of trustees of a Discretionary Supplemental Needs Trust, since they must be committed to identifying the needs of the disabled child, investigating all sources of benefits available to the child apart from the trust, and ensuring that the child receives them before expending any of the trust assets.
Fundamentally, the trustee must have both the time and the talent to perform this job well. If possible, one or more alternate or successor trustees should also be named in the trust document to serve if the initial trustee later ceases to serve for any reason.
STEPS TO TAKE IN ESTATE PLANNING
| As is evident from the above discussion, estate planning for families with a disabled child involves many considerations. Any plan for such a family should start with an understanding of the specific disabling condition that affects the disabled child. |
| Capacity is not an all-or-nothing condition. An estate plan intended to benefit a child who, with some supportive services, can live independently in society may differ significantly from a plan for a child who will always need institutional care. |
| If the child is physically but not mentally impaired, the estate plan should recognize the child's ability to make decisions and participate in the management of his or her financial resources. |
| Any estate plan should be flexible. The plan should address the possibility of a change in the child's condition. The less certain the long-term prognosis, the more flexibility the plan should contain. |
| As with any estate plan, be prepared to review and if necessary revise your estate plan every three to five years, or any time there is a significant change in the law. |
