Children with intellectual or developmental disabilities caused, for example, by Down syndrome, spina bifida, or autism, and other disabled family members, such as a spouse or parent suffering from Alzheimer’s disease, present unique estate planning challenges. The primary goal in such cases is to make sure that these beneficiaries will have available to them all the resources they will need to reach their maximum potential and enjoy as high a quality of life as possible, while still maintaining their eligibility for S.S.I., Medicaid, S.S.D.I., and other government-funded benefits.
Specialized planning will also be necessary when a disabled family member becomes entitled to outright ownership of a sum of money, for example by an inheritance coming directly from a deceased relative’s estate, or by damages being awarded as the result of a lawsuit. (Such lawsuits often arise when the negligence of others was the cause of the disability).
This Article will discuss two kinds of Special Needs Trust that have been developed for the situations described above that can be established for the disabled family member’s benefit, while still preserving their eligibility for public assistance benefits.
ABLE Savings Account. If the amount of the inheritance or damage award is not considered large enough to warrant the establishment of a Special Needs Trust, an alternative may be to place the funds in a state-sponsored ABLE Savings Account, which is also discussed below. This Account can provide a tax-free solution to save for a beneficiary’s disability-related expenses, while maintaining their eligibility for government benefits.
NOTE: In some cases the disability of a child or grandchild will be the result of a substance use disorder involving opioids, alcohol, or stimulants. Mental health problems, such as depression, anxiety, bipolar disease or schizophrenia, may be contributing factors. Please see our separate article, Substance Abuse Trust for a Child or Grandchild, for a discussion of the unique kind of special needs trust that can be established to help these beneficiaries in their recovery.
CONTENTS
■ THIRD-PARTY SPECIAL NEEDS TRUSTS
■ Options for Providing for a Disabled Family Member
■ Designing and Administering a Discretionary Supplemental Needs Trust for a Disabled Family Member
■ Steps to Take in Estate Planning
■ SELF-SETTLED TRUSTS USING THE DISABLED PERSON’S OWN ASSETS
■ Payback Trusts
■ Pooled Trusts
■ COMPARING THE SPECIAL NEEDS TRUST AND SUPPLEMENTAL NEEDS TRUST
■ ABLE SAVINGS PROGRAM
■ THIRD-PARTY SPECIAL NEEDS TRUSTS
Third-Party Special Needs Trusts are used by families who want to ensure that a disabled child or other Medicaid-qualified family member will receive all the public assistance benefits to which they are entitled. (This article will refer to a disabled “child,” but the same discussion would apply to an older family member suffering from Alzheimer’s disease or other cause of disability.)
BASIC QUESTIONS:
Who Will Be Substitute Caregivers?
If the disabled child’s parents have been providing for their daily living needs, the practical questions are:
■ What will happen when the parents can no longer handle these duties?
■ Who else would be able and willing to provide an appropriate level of care for the disabled child?
Who Will Take Over Their Financial Affairs?
Who will administer the disabled child’s property and financial affairs, including acting as their advocate with government agencies to make sure that they receive all public assistance benefits when the parents are no longer able to perform those functions?
What to Avoid
If no planning has been done in one or both of these areas, a court-supervised guardianship will be the only alternative. However, guardianship should be seen as the solution of last resort, to be avoided if at all possible.
Options for Providing for a Disabled Child
1. 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 law. The same result will occur if the parent’s Will makes an outright bequest to the disabled child.
This is clearly 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 Medicaid reimbursement claims by the state, if the child was previously receiving public benefits. Outright ownership may also render the child prospectively ineligible for future 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.
2. Indirect Transfer to Child Using a Third Party
The “indirect transfer” technique involves transferring property intended for the use of the disabled child to a third party, such as a sibling or other family member, with the unwritten understanding that the third party will use the property to provide for the needs of the disabled child.
This in an inherently risky maneuver, because there can be no assurance that the disabled child will ultimately receive any of the property. Since by definition the disabled child can have no legal claim to the assets, the bequest will technically be treated as the property of the third party.
Even if the third party is totally trustworthy, there is always the risk that they may die, be divorced, acquire a creditor as the result of a lawsuit, or go into bankruptcy. In any of these events, the property will likely be involuntarily lost.
3. 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 will be 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. The trustee is not given any discretion to consider other resources, including public assistance benefits, that could be used to benefit the child.
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.” Likewise, in this type of trust that trustee will have no discretion to consider public assistance benefits that could be used to benefit the child, so the trust will be treated as having the primary duty to provide for the child’s needs.
Although almost all trusts for children routinely contain the terms “maintenance” and “support,” they should not be used for a trust intended to benefit a disabled child, since these words will likely make the trust assets be classified as an “available resource” and thus 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, including the power to consider other benefits that may be available to the child. The stated purpose of this trust is that trust property should only supplement — but not supplant — the public assistance benefits for which the child is eligible.
Because the trust will not be considered a primary source of benefits, 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, finding that a discretionary trust funded with assets contributed by the child’s parent or other third parties, and where the trust property is clearly intended only to supplement and not supplant public assistance 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
A Discretionary Supplemental Needs Trust can be created either in a parent or grandparent’s Will or by a Lifetime Trust they would establish. That choice will depend on the parent or grandparent’s overall estate planning goals, and whether perhaps other family members may also want to make gifts to benefit the disabled child.
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
Whom should you appoint as the trustee or trustees of a Discretionary Supplemental Needs Trust? If the Trust will be established in the Will of the second parent to die, by definition neither parent will be available to serve. One or more other persons or a trust company will have to be named to serve either individually or together as the initial and successor trustees.
Special talents are required of trustees of a Discretionary Supplemental Needs Trust. They must not only be able and willing to serve as trustees in the traditional sense, such as prudently managing and investing the trust property, but they must also be committed to acting proactively as the disabled child’s protectors and advocates.
For example, the trustees should be committed to spending time regularly with the disabled child and their caregivers to identify the child’s current needs, to investigate all sources of private funds, such as health insurance, and public benefits that may be available to meet those needs, and to ensure that the child applies for and receives all the public benefits to which he or she is entitled.
An individual trustee thus should have both the time and the talent to carry out these tasks. A trust company can be appointed to serve as a co-trustee with the individual, or it can be named as an alternate or successor trustee to serve if the individual trustee is or becomes unable or unwilling to serve. In that case, it is important to choose a trust company (not necessarily a bank trust department) that has special expertise in administering Supplemental Needs Trust and acting as a protector and advocate for special needs beneficiaries.
Expenditures from Supplemental Needs Trust
Distributions must be limited in purpose so that they will only supplement, but not supplant, the public assistance benefits to which the beneficiary is eligible to receive.
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 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 their 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.
Don’t Overlook Estate Planning for the Rest of the Family
Planning for the needs of 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.
■ SELF-SETTLED TRUSTS: PLANNNG WITH THE DISABLED CHILD’S OWN ASSETS
The use of the discretionary supplemental needs trust as recommended above is based on the assumption that the trust will be funded exclusively with assets being contributed by a parent, grandparent, or other third party, with none of child’s own assets being placed in the trust.
By contrast, if the assets sought to be protected belong to the disabled child themselves, a self-settled type of trust, commonly referred to as a Special Needs Trust, is the vehicle of choice.
Basis in Federal Statutes
Since the Medicaid and SSI eligibility protection offered by a Special Needs Trust is based on federal statutory law, specifically 42 U.S.C. § 1396p(d)(4)(A) and § 1396p(d)(4)(C), it is essential that the Special Needs Trust be designed and administered in strict conformity with these statutes’ requirements.
For Pennsylvania residents, Pennsylvania has also enacted a statute as part of its Public Welfare Code that spells out the provisions that a self-settled Special Needs Trust must contain in order to receive approval from the Pennsylvania Department of Human Services (“DHS”).
The Special Needs Trust can allow the disabled child to receive the same kind of discretionary benefits that are available with a Supplemental Needs Trust, yet still allow the child to retain their eligibility to receive government benefits.
Under the Special Needs Trust Fairness Act, signed into law in 2016, a competent disabled person under age 65 can establish their own Special Needs Trust, without having to use a proxy or obtain court permission to do so.
A Special Needs Trust can take one of two forms, based on the requirements of § 1396p(d)(4)(A) or § 1396p(d)(4)(C):
1. Payback Trust
The “Payback” or “d4A” Special Needs Trust must provide that upon the death of the disabled child (or earlier termination of the Trust), DHS must first be reimbursed up to the total amount of medical assistance that will have been paid out on behalf of the child, before anyone else can receive any part of the remaining Trust property. (As noted below, a Pooled Trust has a somewhat different rule.)
To make sure that DHS’s right of reimbursement is enforced, the trustee is required to notify DHS upon the death of the beneficiary (or earlier termination of the Trust) and request a statement of its claim for reimbursement.
2. Pooled Trust
The “Pooled” or “d4C” Special Needs Trust must provide that at the Trust’s termination the assets not retained to benefit other disabled individuals (generally not more than 50% of the total) must be used to repay DPW. In this case nothing will pass to the disabled child’s family.
■ COMPARING THE SPECIAL NEEDS TRUST AND THE SUPPLEMENTAL NEEDS TRUST
The big difference between the self-settled Special Needs Trust and the third-party funded Supplemental Needs Trust is the statutory limitation imposed on Special Needs Trust with regard to who can receive the trust assets that may remain when the trust terminates.
No such limitations are imposed on the Supplemental Needs Trust that has been funded with a third party’s assets, so that it can provide that all the remaining assets are to be paid out to surviving family members or revert back to the person who funded the trust if they are then living.
■ ABLE SAVINGS ACCOUNT
An ABLE Savings Account can provide individuals who have a qualified disability that began prior to their attaining age 26 with a tax-free way to save funds with which to meet disability-related expenses, while still maintaining their eligibility for government benefits. Family members and friends can also contribute to the disabled person’s ABLE Savings Account. Like Section 529 Accounts used for education expenses, ABLE Savings Accounts are administered by the individual states. See Directory of State ABLE Programs.
For Pennsylvania residents, the Pennsylvania Treasury Department maintains a web-site, PA ABLE Account Program, that provides extensive information about how the PA ABLE Savings Account works, including:
■ The two eligibility requirements that must be satisfied in order to qualify for an ABLE Savings Account.
■ The tax benefits afforded by the PA Able Account, particularly for Pennsylvania residents.
■ Detailed list of the “Qualified Disability Expenses” that the Account can be used to pay for.
The web-site also supplies an Enrollment Form that can be downloaded and used to open up an ABLE Account online, or to request a rollover from another qualified ABLE plan.
Effect of ABLE Savings Account on SSI and Medicaid Eligibility
An ABLE Savings account for a disabled person will generally be treated as an addition to, not as a replacement for, any government programs for which they are eligible. For example, in determining the disabled person’s eligibility for a needs-based program, including Medicaid, only the assets in an ABLE Account in excess of $100,000 will be counted.