Provided by
Michael W. McGreaham
Attorney at Law
101 S. Capitol Blvd.
10th Floor
PO Box 829
Boise, Idaho
83701-0829
Tel (208) 345-2000
Fax (208) 385-5384
Committed to providing the highest quality estate planning legal
services for individuals, families and businesses.
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Do
you have a special family member, or know someone who does? If
so, you will want to bookmark this article for future reference and
share it with others.
That said, this article is not a substitute for
competent legal counsel regarding this very complex subject matter.
Rather, it is intended to stimulate informed thought, open discussion
and appropriate action while there still may be time to make appropriate
legal plans.
Financial
Challenges
Not only do parents of special needs children
face unique challenges in providing for the daily special needs of such
children while both parents are alive, they face unique challenges in
providing for them after both parents are deceased. This is true whether
the children are minors (e.g. under age 18 in most states) or adults.
The financial costs of caring for a special
needs family member can be over-whelming. Many of these costs are
incurred for needs over and above room and board. Specialized equipment
and skilled professional assistance may be required for many of life’s
otherwise routine tasks. Ongoing and expensive medical care is common,
often without private health insurance to cover the bills. While
assistance is available from state and federal governments, such
assistance is subject to strict financial eligibility requirements.
Planning
Challenges
Given the unique challenges faced by families
with a special needs family member, the Life & Estate Plans of the
parents (and grandparents) must be carefully tailored and monitored to
meet objectives beyond probate avoidance and federal estate tax
minimization. Although the challenges differ in each case, there is one
fundamental planning objective common to all: How can parents (and
grandparents) help assure adequate care throughout the lifetime of their
special needs family member…without disqualifying them from government
assistance?
Do No Harm
In medicine, the first rule is to do no harm.
So it is with planning for the needs of a special family member. Parents
and grandparents should be discouraged from establishing custodial
accounts for a special needs minor child. Why? Once such a minor
child reaches the age of majority under state law, the custodial account
is distributed to the now special needs adult child (or to their
lawfully appointed guardian/conservator on their behalf). This
distribution itself may disqualify them from government assistance
subject to certain financial resource limits. Similarly, if parents (and
grandparents) leave assets directly to or for the benefit of the special
needs family member, whether outright or in a plain-vanilla trust, then
the same disqualification may result. When assets of the special needs
adult exceed the governmental financial resource limits, then they may
be disqualified from both Supplemental Security Income (SSI) and
Medicaid until the disqualifying funds are spent-down.
Supplement,
But Don’t Supplant
Even
if a special needs adult qualifies for SSI and Medicaid, the benefits
provided are limited. Because most of the meager monthly SSI benefit* is
used for food, clothing and shelter, little if any financial resources
are left for life’s extras. For example, Medicaid covers medical care
and prescription drugs, but not dental work. The key, then, is to
financially supplement for life’s extras without financially
supplanting government assistance.
But
how can this be done when an inheritance is left without special
planning for a special needs family member?
Payback
Trusts
As part of the Omnibus Budget Reconciliation
Act (OBRA) of 1993, a trust containing certain statutorily required
provisions may be established to administer and distribute trust assets
for a special needs beneficiary without otherwise disqualifying them
from government benefits.
These special provisions require the trust to payback
the government post-mortem for government benefits provided to the
special needs beneficiary of the trust. If trust assets are depleted or
are otherwise insufficient to fully payback the government, then no
further reimbursement is required from the family. However, if trust
assets remain after the payback, then the remaining assets may be
distributed to further beneficiaries designated under the trust.
*
The Federal Benefit Rate (FBR) for 2003 is $552. It changes annually and
some states provide a financial supplement to the FBR.
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In
this article we will review two alternative planning techniques to the Payback
Trust discussed in the main article (above), along with an effective
method to help finance long-term security.
Special Needs Trusts
A Special Needs Trust provides
distributions only for life’s extras that do not disqualify the
special needs beneficiary. Distributions are made at the discretion of a
disinterested Trustee. Authorized distributions may include
dental expenses, special schooling, travel expenses, or even a
television. Upon the death of the special needs beneficiary, the
remaining trust assets may be administered on behalf of other
non-special needs family members.
In some Special Needs Trusts, a poison pill
provision may be included. Such a provision may instruct the Trustee to
distribute the trust assets to non-special needs family members if the
trust is or may be deemed to disqualify the special needs beneficiary
from government assistance. Should this poison pill provision become
triggered in the future, the other beneficiaries would be under a moral,
not a legal obligation to provide the trust assets for their special
needs family member.
Blended
Discretionary Trusts
A Blended Discretionary Trust is often
used for general asset protection purposes to protect an inheritance
from the potential divorces, lawsuits and bankruptcies of its
beneficiaries. This trust has multiple beneficiaries, each with no
specific right to any distribution of income or principal from the trust
assets.
To be most effective, any distributions must be
in the sole and absolute discretion of the disinterested Trustee,
without regard to any ascertainable standards such as health,
education, maintenance or support.
Nevertheless, the Trustmaker(s) may prepare a
non-binding letter of intent to provide guidance to the Trustee. A
Blended Discretionary Trust is often used to include even grandchildren
as eligible beneficiaries and avoid inclusion in the estates of the
children for federal estate tax purposes by careful application of each
parent’s generation-skipping transfer tax exemption. Leveraged Funding
Payback Trusts, Special Needs Trusts and
Blended Discretionary Trusts all
require one common denominator to effectively finance the long-term
security of a special needs family member: money.
One of the most powerful financial tools to
accomplish this funding requirement is life insurance. Simply put: life
insurance provides a sum certain in cash at an uncertain time in the
future with dollars purchased in advance at a discount. In addition to
individual life policies, a married couple may be insured together under
a joint life policy that only pays its death benefit after the death of
the surviving spouse. As a result, a joint life policy typically
provides a greater return on investment than would two individual life
policies insuring the same insureds for the same total death benefit. In
addition, through careful legal planning, the death benefits of life
insurance policies and their eventual proceeds may be excluded from the
estates of the insured parents (or grandparents). Conclusion
Eligibility regulations for government
assistance are complex and vary in their application by jurisdiction.
Accordingly, always seek competent legal counsel before committing your
resources.
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