Parents of children with special needs are no stranger to worry. How do I provide the best care for my child? The best education? And, ultimately, how will my child with special needs fare after my death? Being a parent of a special needs child means incorporating these needs into your estate planning. Several options are worth exploring as you navigate this important task.
Getting started with estate planning
When it comes to estate planning, needs may vary from family to family but you should keep a few universal requirements in mind: lifetime financial support for the child with special needs, protecting the ability to utilize public benefits, and planning for any financial needs should public benefits cease.
“If you don't make a will or trust, your assets will be split up among family members according to a default set of rules, called an intestacy statute, which is different in every state," H. Lillian Vogl, JD, CFP, says. “If any of your children still need a guardian because of their age or special needs, the court will decide who that should be. A last will and testament can tell the courts who you want the guardian to be, but the judge has to decide if that is actually in the best interests of your child. For assets, on the other hand, courts will follow your written instructions as long as they are clear and have the right signatures and witnesses."
Assuming you want to leave instructions and not just take a chance on state courts and intestacy laws, you will need to work with a lawyer or legal documents service to create a will and/or trust. Here are some options to consider, but each comes with limitations.
- Leave the child with special needs an inheritance. (This is likely what will happen under state law if you don't have a will or trust.) Even if the child is capable of managing these funds, leaving a set amount to a child with special needs may reduce or even eliminate public benefits, including training, housing, or even Medicaid.
- Leave the entire inheritance to other siblings. You may choose to leave your assets to your children without special needs, with the understanding that those siblings will care for the child with special needs. “This might seem like a simple solution," Vogl says, but it often backfires. “The money might end up in the hands of a sibling's ex-spouse or other creditors instead of helping your special needs child. The potential for family conflict and other problems is high. Consider making this sibling a trustee for a special needs trust instead."
- Establish a special needs trust. For the majority of families, this is the ideal option. Since the assets held in this trust are not available to the child with special needs but rather managed entirely by a trustee, they cannot be considered income. The terms of the trust forbid the child with special needs from overriding the trustee under any circumstances. Trusts can be established as part of a last will and testament or as a living (revocable) trust. The latter option allows for others to contribute to the trust.
Additional considerations for special needs trusts
When establishing a special needs trust, appointing a worthy trustee is essential. This person will be making sure the child with special needs is cared for after you can no longer help. While a sibling may be a potential trustee, take care to select one who has the time and resources to manage your child with special needs' care. Other persons to consider may be a close friend, your attorney or your financial advisor. Some trusts have multiple trustees to handle different tasks, like a family member making decisions about spending money for the child with special needs, and a legal or financial professional managing the money and paperwork.
Although not legally binding, an advance statement of wishes should be written to the trustee, outlining your specific priorities for the use of the special needs trust.
Using life insurance in estate planning
Although not specific to special needs estate planning, life insurance is an important factor when completing any last will and testament. Life insurance policies can be used to fund a special needs trust. According to Vogl, this is a smart way to provide for a child with special needs and she encourages naming a trust as the beneficiary. "A person with special needs should not be named the direct beneficiary of a life insurance policy because the death benefit could disqualify them from government assistance or end up managed poorly," she says.
“There is a back-up plan if estate assets or life insurance are assigned directly to a person with special needs," Vogl adds. “Federal law allows people who would otherwise be disqualified from Medicaid to put these assets in a 'self-settled' or 'first-party' special needs trust to avoid this result. The downside is that these trusts have much less flexibility than a living or testamentary trust, and anything left over after the child with special needs dies goes to reimbursing the state Medicaid fund."
Planning for what will happen after you die can be daunting, even more so when you must consider and provide for a child with special needs. But utilizing this information to get started will help provide peace of mind as you move forward.
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