6 Estate Planning Tips for Special Needs Families

October 26, 2022

Estate planning is a financial task that, for special needs families, is vital and comes with additional considerations and complications.

If you have a child or another dependent family member with a disability, having a solid plan to cover that person’s financial and physical requirements when you’re gone will help ensure they don’t suffer.

If your dependent is a minor with a disability or an adult who has been disabled since childhood, they may be qualified for public benefits like Medicaid and Supplemental Security Income.  They may also qualify for nutrition assistance, public housing assistance, or care providers.

You can design your estate plan to accommodate these income- and resource-contingent benefits to ensure that your dependent remains well-cared-for and secure when you’re gone.


Special needs estate planning is key

Why is it important for special needs families to establish a solid estate plan?

Suppose you die and leave behind a special needs dependent without a protective estate plan for them. In that case, your death could trigger unintended negative consequences beyond emotional loss, including the loss of medical coverage or housing.

For example, if you have a substantial life insurance policy or other assets and leave them to your dependent in a lump sum, the resources might push them over the limits for receiving vital public assistance services.

But this sum may be depleted in a short time if it’s their sole source of income. Or maybe your assets are sufficient to support your special needs dependent for the rest of their life, but a lump sum inheritance complicates their tax obligations or exposes them to financial risks.

Most families fall into the first category, but even special needs families with generous assets would want to create a solid plan to protect the quality of life of their loved ones. A trust fund may be the answer in either case.

Setting up a trust designed to protect those needs is one way to ensure continuity of care and minimal material disruptions for your loved one when you are gone. Before you jump into an estate plan, it’s beneficial to sit down and identify your desired outcomes for your special needs dependent.

Several factors could affect your plan design, including your dependent’s age, specific disability and care needs, and any public assistance they receive. Your plan may need to evolve as your child or dependent family member grows into adulthood.

Some adults with disabilities live relatively independently and may even be able to work. Other adults with disabilities may require round-the-clock care or a guardian to ensure their fiscal obligations are met.

You may want to tackle the details on your own or work with a registered investment advisor so nothing falls through the cracks. Look for one that has one or more of these credentials: CFP® (Certified Financial Planner), ChSNC®(Chartered Special Needs Consultant) or, AIF®  (Accredited Investment Fiduciary).


3 different types of trusts for special needs families

Suppose your family has sufficient assets to support your special needs dependent after your death. In that case, you may opt to establish a discretionary or another non-special-needs-specific trust to protect those assets throughout your loved one’s life.

But if your disabled family member will rely on public assistance programs to meet their daily needs, consider some form of special needs trust to protect their access to these services. Some trust vehicles to protect your dependent’s assets include a first-party special needs trust, a third-party special needs trust, or if you have multiple dependents, a pooled trust.

1. First-party special needs trusts

Not everyone in the special needs category has the same level of disability or dependence. A child with autism or Down Syndrome may have more specific guardianship or care requirements than someone with partial paralysis, which limits some physical functions but allows for everyday decision-making and living.

For adults with special needs who have accumulated funds of their own through their own employment, inheritance, or perhaps a lump sum settlement due to an accident,  a first-party trust fund can be established in order to help preserve eligibility for public benefits.

Qualifications for a first-party trust include that it must be irrevocable, the beneficiary must be disabled, and they are under age 65 when it is created. First-party trust also includes a Medicaid payback provision which should be considered in your planning.

2. Third-party special needs trusts

A third-party trust can be created and funded by anyone other than the person with a disability. It also does not have age limits. Other relatives may contribute to the trust, and you can set parameters so that it is not funded until you die. The trust can be formed as a stand-alone trust created during your lifetime or created at your death by will as a testamentary trust. It is very important to speak with qualified advisors and estate planners to help you determine whether you need a stand-alone (often referred to as an inter-vivos trust) or testamentary trust created at your death.

3. Pooled special needs trusts

For some, it may make sense to consider the use of a Pooled Trust. Pooled trusts provide a resourceful option. They often provide well-trained staff and access to professional trustees, which can be a task to identify on your own. While not for everyone, a pooled trust is an option to consider.

These trusts are established with the responsibility for multiple recipients and may include sub-accounts within a larger pool. Pooled trusts can be first-party or third-party trusts, and the parameters, costs, and other requirements will vary. Pooled trusts managed by non-profit organizations often require payment of a designated amount to the organization before the balance of the funds can be disbursed to the remainder of beneficiaries.


3 estate planning tips when setting up a trust for a special needs dependent

Once you have established your dependent’s care requirements, the assets to protect, and the type of trust that makes sense for your special needs family, consider these additional steps to ensure a seamless transition for your dependent after you die.

  • Designate a trustee

As part of your planning process, pick a trustee, a successor trustee and have your attorney establish a trust advisory committee for the special needs trust fund. The trustee is responsible for ensuring financial obligations are met. That wise stewardship ensures continued resources for your loved one’s care.

If your dependent is legally competent and able to manage their finances well, they may be the best choice of trustee. However, if they are not capable or need more specialized care, decide whether they need a public guardian, a family member, or an organization serving as a trustee.

  • Fund the trust

Depending on the type of trust fund, you (and potentially other relatives) may begin funding the dependent’s trust fund while you are still living. Or, you may establish a trust that will be funded by a life insurance payout or other assets when you die. Either way, plan to ensure sufficient resources are available for your loved one and seek the help of qualified advisors to help you determine an estimated dollar amount of lifetime support for your loved one.

  • Plan for costs

Trusts vary depending on options and type but often come with fees. Look at the investment options for the funds so that they earn interest over time, but keep an eye on the potential costs and tax burden for your beneficiary.


Special needs estate planning done right

Solid special needs estate planning will give you peace of mind knowing that you protected your loved one from financial loss and quality of life disruption after you’re gone. A good plan would ensure they continue to be cared for at the same level as when you were alive, allowing them to receive the medical, housing, nutrition, and physical assistance they need to thrive.

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