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Estate Planning Special Needs Trusts Planning for family members with special needs
On July 17, 2002 the Society for Financial Service Professionals held an audio conference entitled Special Needs Children and Financial Planning. Since many of us have worked with clients with a child, spouse, brother or sister who will need a lifetime of physical and financial care, we appreciate the need for advisors to understand the technical aspects of planning for people with disabilities. The following are two articles by professionals who attended the audio conference:
It is our hope that this information will prove valuable to those of you unable to attend. Michele and Bill welcome your comments and questions and I look forward to hearing from you in the future. The Society of Financial Service Professionals presented an audio seminar on Special Needs Children and Financial Planning: What Planners Need to Know on July 17, 2002. Peter J. Strauss, Esq. and Nadine O. Vogel, two nationally recognized professionals in special needs planning, presented the seminar. They presented a succinct program in a subject that can become complex in specific fact and family situations. The need for special needs planning is real and immediate. Data shows that at least 10% of American children have special needs (reflected in education services) and 20% of all Americans report some disability. There are federal and state "needs tested" programs available to people with qualifying disabilities. With proper planning a person may use their family’s resources to supplement the state programs’ basic benefits without making themselves ineligible for state assistance. This means a higher quality of life then having minimal resources and depending solely on government services. The outline presented at the seminar covers the basics of how to approach special needs planning. The special needs trust (SNT) discussed in the outline is a purely discretionary trust to supplement government needs tested benefits. The SNT is contrary to the "ascertainable standard" trust found in more traditional estate planning documents, where principal is distributed for health, education, support and maintenance and there are annual income distribution requirements. There are different types of trusts with drafting requirements depending on who owns, or is deemed to own, the resources. Most families choose to fund (or supplement funding) of the SNT with life insurance on the parents or caregivers. The financial services professional should coordinate the short and long term financial planning with an attorney experienced in special needs planning to prepare the legal documents. This writer can testify that if a financial services professional provides competent and coordinated special needs planning services, the rewards are a long-term client with a substantial referral base open to that planner. With one out of five (53.9 million) Americans reporting a disability, one out of nine children under age 18 receiving special education services, and seven out of ten Americans directly or indirectly impacted by a disability, understanding the supplemental needs trust is an important part of properly planning and providing adequate resources to meet these needs. Supplemental needs trusts are created either by family members for a person with a disability (PWD) or by the PWD. If created by a family member of a PWD the trust can be funded by the assets of the family member, by a will or living trust, or by third party trusts. When the PWD creates the Supplemental Needs Trust, the assets or income of the PWD funds the trust. In establishing these trusts it is critical to properly structure the trust so that the beneficiary will remain eligible for Supplemental Security Income (SSI) and Medicaid. The federal laws that establish these guidelines are:
State law regarding these issues varies, but each state’s program must meet minimum federal requirements and may be more generous than the federal program, but not more restrictive. Quality of Life It is equally important to remember that just providing for lifetime care for the PWD is not sufficient, but that their quality of life should be tantamount. It is of little comfort to think that a loved one with special needs is only being provided with the minimum level of care to sustain life. To ensure that a high quality of life is provided for the PWD, great care should be taken when deciding on how to fund the trust. There are four primary methods of funding a supplemental needs trust.
Of the four, life insurance may provide the most predictable and potential benefits for funding the trust. These benefits include:
Life insurance comes in many forms including term, whole life, universal, and survivorship. Nadine O. Vogel, one of the conference speakers recommended survivorship life Insurance for funding the trust because it generally costs less than insuring two people individually and because frequently the PWD is dependent on two people. When the last of the providers dies, these funds would be valuable resources to the PWD. It should also be noted that special care needs to be taken if using property or investments to fund the trust, as these are both subject to fluctuations in value depending on market conditions. Once the decision has been made on how to fund the trust, the amount of funds needed to properly fund the trust must be determined. When making this determination, the grantor needs to consider several key issues. First, the comprehensive expenses for a lifetime of care should be projected using monthly income needs. Second, when choosing a rate of return on investments it must be one that the grantor is comfortable with and that is reasonable. Finally, the grantor should provide sufficient funding so that it is not necessary to deplete the principal. Letter of intent The final consideration when establishing the trust that is often forgotten is the letter of intent. This letter details the grantor’s wishes and any special instructions or needs that the PWD may have. For instance, the letter should specify who will take care of the PWD, what goals for the PWD that the caregiver has, and other instructions such as special care requirements or needs. In the process of writing the letter of intent, the caregiver will be able to thoughtfully look into the future and have a meaningful document to discuss the care needs of the PWD with a future guardian. The key to providing for the special needs of a PWD is planning and execution. The caregiver should be encouraged to spend time with a professional to assess the income needs of the PWD and the resources required to provide a lifetime of income, untouchable by the government. Once the planning is complete, then implementation of the plan is essential. That implementation will frequently require new estate planning documents, trusts, life insurance, funds for emergencies, as well as a plan to help the caregiver achieve his or her goals for financial independence and retirement. Michele O'Brien is a Houston-based attorney. She is board certified in estate planning and probate by The Texas Board of Legal Specialization. She may be reached by phone at (713) 960-8543 or by e-mail at michele@mob-law.com.
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