Planning for Disabled Children

Americans are living longer than they did in years past, including those with disabilities. According to one count, 480,000 adults with mental retardation are living with parents who are 60 or older. This figure does not include adult children with other forms of disability nor those who live separately, but still depend on their parents for vital support.

When these parents can no longer care for their children due to their own disability or death, the responsibility often falls on siblings, other family members, and the community. In many cases, expenses increase dramatically when care and guidance provided by parents must instead be provided by a professional for a fee.

Planning by parents can make all the difference in the life of the child with a disability, as well as that of his or her siblings who may be left with the responsibility for caretaking (on top of their own careers and caring for their own families and, possibly, ailing parents). Any plan should include the following elements:

A Plan of Care

Where is your son going to live when he can no longer live with you? Will he move in with a sibling? Or into a group home? Who will make the decision? Who will monitor the care he receives? It’s never too soon to begin answering these questions and making sure that the living and support arrangements are in place.

In some cases, it can ease the transition for all concerned if the child moves to the new living arrangement while his parents can still help with the process. In many parts of the country, non-profit organizations and private consultants can help set up the plan, research available options, and assist in the move.

It will help everyone involved if the parents create a written statement of their wishes for their child’s care. They know him better than anyone else. They can explain what helps, what hurts, what scares their child (who, of course, is an adult), and what reassures him. When the parents are gone, their knowledge will go with them unless they pass it on.

In almost all cases where a parent will leave funds at death to a disabled child, this should be done in the form of a trust. Trusts set up for the care of a disabled child generally are called “supplemental” or “special” needs trusts, which are described in more detail below. (To go directly there, click here.)

Money should not go outright to the child, both because she may not be able to manage it properly and because receiving the funds directly may cause the child to lose public benefits, such as Supplemental Security Income (SSI) and Medicaid. Often, these programs also serve as the entry point for receiving vital community support services.

Some parents choose to avoid the complication of a trust by leaving their estates to one or more of their healthy children, relying on them to use the funds for the benefit of their disabled siblings. Except in the case of a very small estate, this is generally not a good idea. It puts the healthy child in the difficult position of having to decide how much of her money to spend on her sibling. Such funds also will be subject to claim by creditors and at risk in the event of divorce or bankruptcy. Finally, the child who receives the funds may die before the disabled child without setting these funds aside in her estate plan.

Life Insurance

Finally, a parent with a disabled child should consider buying life insurance to fund the supplemental needs trust set up for the child’s support. What may look like a substantial sum to leave in trust today may run out after several years of paying for care that the parent had previously provided. The more resources available, the better the support that can be provided the child. And if both parents are alive, the cost of “second-to-die” insurance–payable only when the second of the two parents passes away–can be surprisingly low.

The good news is that advance planning for a disabled child can make a significant difference in his life. You just have to take the first step.

Supplemental Needs Trusts

Supplemental needs trusts (also known as “special needs” trusts) allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds and yet not lose her eligibility for certain government programs. Such trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining her eligibility for public benefits. As their name implies, supplemental needs trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that are not available from public assistance. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. (However, the trustee can use trust funds for food, clothing and shelter if the trustee decides doing so is in the beneficiary’s best interest despite a possible loss or reduction in public assistance.)

Very often, supplemental needs trusts are created by a parent or other family member for a disabled child (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up in a will as a way for an individual to leave assets to a disabled relative. In addition, the disabled individual can often create the trust himself, depending on the program for which he or she seeks benefits. These “self-settled” trusts are frequently established by individuals who become disabled as the result of an accident or medical malpractice and later receive the proceeds of a personal injury award or settlement.

Each public benefits program has restrictions that the supplemental needs trust must comply with in order not to jeopardize the beneficiary’s continued eligibility for public benefits. Both Medicaid and SSI are quite restrictive, making it difficult for a beneficiary to create a trust for his or her own benefit and still retain eligibility for Medicaid benefits. But both programs allow two “safe harbors” permitting the creation of supplemental needs trusts with a beneficiary’s own money if the trust meets certain requirements.

The first of these is called a “payback” or “(d)(4)(A)” trust, referring to the authorizing statute. “Payback” trusts are created with the assets of a disabled individual under age 65 and are established by his or her parent, grandparent or legal guardian or by a court. They also must provide that at the beneficiary’s death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary’s behalf.

Medicaid and SSI law also permits “(d)(4)(C)” or “pooled trusts.” Such trusts pool the resources of many disabled beneficiaries, and those resources are managed by a non-profit association. Unlike individual disability trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary herself. In addition, at the beneficiary’s death the state does not have to be repaid for its Medicaid expenses on her behalf as long as the funds are retained in the trust for the benefit of other disabled beneficiaries. (At least, that’s what the federal law says; some states require reimbursement under all circumstances.) Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to the trust will incur a transfer penalty. (See Medicaid: The Transfer Penalty.)

Income paid from a supplemental needs trust to a beneficiary is another issue, particularly with regard to SSI benefits. In the case of SSI, the trust beneficiary would lose a dollar of SSI benefits for every dollar paid to him directly. In addition, payments by the trust to the beneficiary for food, clothing or housing are considered “in kind” income and, again, the SSI benefit will be cut by one dollar for every dollar of value of such “in kind” income. Some attorneys draft the trusts to limit the trustee’s discretion to make such payments. Others do not limit the trustee’s discretion, but instead counsel the trustee on how the trust funds may be spent, permitting more flexibility for unforeseen events or changes in circumstances in the future. The difference has to do with philosophy, the situation of the client, and the amount of money in the trust.

Choosing a trustee is also an important issue in supplemental needs trusts. Most people do not have the expertise to manage a trust. An alternative is retaining the services of a professional trustee. For those who may be uncomfortable with the idea of an outsider managing a loved one’s affairs, it is possible to simultaneously appoint a trust “protector,” who has the powers to review accounts and to hire and fire trustees, and a trust “advisor,” who instructs the trustee on the beneficiary’s needs. However, if the trust fund is small, a professional trustee may not be interested. This can be an argument for pooled trusts.