1. finance
2. personal finance
3. financial planning
4. estate planning

June–July 2008
Special Planning Is Needed for
Families with a Special-Needs Child
By Sebastian V. Grassi, Jr.
Sebastian V. Grassi discusses crucial estate
planning considerations for families with a special-needs child.
Preface
This article is a general overview of issues that an attorney may need to address when preparing an estate
plan for a family with a special-needs child. 1 The article assumes that the attorney is knowledgeable about
general estate planning matters (wills, trust, powers of
attorney, advanced medical directives, etc.,) but is not
a specialist or expert in special-needs planning.2
Introduction
In
n addition
add
ditio
on to
o the usual hurdles that parents face
when
be
wh
hen preparing
prep
parin
ng an estate
state plan
p n (e.g.,
(e.g. who should
sh
guardian,
trustee,
of
thee gu
uardiian, tru
e, eexecutor,
tor etc.),, the parents
pa
unique estate
a spec
sspecial-needs
cial need
cial-n
n ds child
d aare faced
ed with a uniqu
planning
pla
anniing chal
cchallenge
lenge 3—how to
o provi
provide
e for all of their
loved
ones
without jeopardizing the special-needs
ed one
es w
child’s current (or potential) eligibility
government
ligibility forr gov
benefits based on the ch
child’ss or ffamily’s
ami y s financ
financial
al
need (“need-based” benefits) such as Supplemental
Security Income (SSI)4 and Medicaid.5
Sebastian V. Grassi, Jr. is a member of the law firm of Grassi
& Toering, PLC, in the Detroit suburb of Troy, Michigan. He is
a member of the Christian Legal Society, and has served on its
national board of directors. He is also the father of an adult special-needs child. Mr. Grassi is a Fellow of the American College
of Trust and Estate Counsel. His practice emphasizes business
law, business succession planning, estate planning and probate,
and related real estate matters. He is the author of A PRACTICAL
GUIDE TO DRAFTING IRREVOCABLE LIFE INSURANCE TRUSTS (with
Sample Forms and Checklists) (2nd ed. 2007) (www.ali-aba.
org/aliabaBK45) and A PRACTICAL GUIDE TO DRAFTING MARITAL
DEDUCTION TRUSTS (with Sample Forms and Checklists) (2004 &
Supp. 2008), both published by ALI-ABA, 800-253-6397 (www.
ali-aba.org/aliaba/BK36.asp), and Understanding Your Eternal
Estate Plan (www.probateandtrusts.com/eternal). He can be reached
at www.grassiandtoering.com, [email protected] or 248-269-2020.
JOURNAL OF PRACTICAL ESTATE PLANNING
Basic Estate Planning
Issues for All Families
Every individual has an estate plan—either one they
have created, or one that the government has created.
The one created by the government involves probate
(i.e., intestacy), is expensive, consuming, favors the
government concerning a special-needs child’s inheritance (i.e., “spend down” of the child’s inheritance
and/or reimbursement of Medicaid benefits), and “favors” the Internal Revenue Service concerning estate
taxes (i.e., no death tax minimization planning). 6 At
the minimum, a special-needs child deserves a parent’s
continued stewardship and guidance, even though the
parent may be incapacitated or deceased. Thus, the
parents of a special-needs child should typically have
the following estate planning documents prepared:
LLast Will and Testament
m
General
Attorney
Financial
Gene
ral Durable Power
ower of Atto
ney for Financ
7
Affairs
(GDPA)
f
Durable Medical Power of Attorney
Revocable Living Trust8
Supplemental Needs Trust9
Tax Planning
Tax planning should not be ignored when preparing
an estate plan that involves a special-needs child.
There is a general (and incorrect) assumption among
some attorneys that taxes are of little or no concern to
families of special-needs children.10 This is unfortunate.
Income taxes, estate taxes, gift taxes and the confiscatory generation skipping transfer (GST) tax should all
be considered and addressed when preparing an estate
plan. Equally important are the income and transfer
tax consequences of a special-needs trust.11
© 2008 S.V. Grassi, Jr.
53
Special Planning Is Needed for Families with a Special-Needs Child
Estate Planning Options Available
to Special-Needs Families
An alternative to a third-party, stand-alone supplemental-needs trust is to have the parent’s last will
and testament or their revocable living trust contain
third-party supplemental-needs trust provisions.
Of the five estate planning options available to parThe benefits18 of an inter-vivos third-party, standents to provide for their special-needs child,12 it is
generally the author’s preference to have the parents
alone supplemental-needs trust are: (1) the trust can be
13
prepare an inter-vivos, third-party,
established by the parents (or by any third party, such
stand-alone
as the grandparents) for the benefit of the special-needs
supplemental-needs trust 14 for the benefit of their
child; (2) the trust provides for the investment and manspecial-needs child. The trust can be either revocable
agement of the special-needs child’s inheritance by a
(i.e., the trust can be modified or cancelled by the
third party—the trustee; (3) the persons establishing the
parents at a later date) or irrevocable (i.e., the trust is
trust (such as the parents or
generally unchangeable,
grandparents) decide the
subject to certain limited
terms and conditions of
exceptions that permit the
In order to assist the trustee of the
the special-needs child’s
trustee to amend the trust
third-party supplemental-needs
inheritance and who is
in order to comply with
trust, a letter of intent should be
to receive the balance
changes in the law conof the trust funds when
cerning public or private
prepared by the parents.
the special-needs child
benefits for the specialdies—rather than having to
needs child). The trustee
15
reimburse the government for Medicaid and/or “costof the supplemental-needs trust is given complete
of-care” 19 benefits provided to the special-needs child;
unfettered discretion in making distributions to or
for the benefit of the special-needs child. A trust
(4) the persons establishing the trust can name who
protector 16 can be appointed with the power to: (1)
should serve as the initial trustee and as the successor trustees, thereby avoiding the risk of the probate
direct the trustee’s actions, (2) terminate the trust
court appointing a “stranger” as a trustee; (5) the trust
(and have the assets be distributed to the remainder
avoids family conflict, since the trust spells out who
benefi
ciaries),
e ficiar
enefi
ries)), (3) remove and replace a trustee,
gets what, when, how and why; (6) the trust avoids
and
(4)
receive
an
d (4
4) rec
ceivve financial-investment
ial-inv stmen statements
stateme and
a probate court guardianship for the special-needs
accountings.
ac
countin
ngs. In no event
eve should
ou thee special-needs
specia
child’s inheritance; (7) the trust (if properly drafted
child
have
ch
ild h
ha e thee power
p er to
t direct
ect the trustee’s
ustee’s actions,
and administered) maintains the special-needs child’s
revoke
terminate
trust,, or rem
remove
evvokee or term
m nat the
he trus
ove the trustee
eligibility for government benefits (assuming the child
for oth
other
her tha
tthan “reasonable cause.”
otherwise
qualifi
ed to receive
government
benefits);
Because the stand-alone supplemental-needs
trust
upplem al-ne
is o
th
q
rec
g ve
is a discretionary nonsupport
up t trust with
with spendthrift
spendth ift
(8) the
he trust
trust coordinates
coo
ordina government
government benefits and ttrust
assets to meet the special-needs
child’s lifetime needs;
provisions,17 the trustee h
has maximum flexibility
b
to
l
(9) the special-needs child can be any age (i.e., the
meet the beneficiary’s needs and maintain the benefitrust is not limited to a special-needs child under age
ciary’s eligibility for government benefits. This type of
65); (10) the trust can provide for the appointment of
trust is also well suited to deal with possible changes
an independent advocate for the special-needs child,
in the amount of government benefits that may be
regardless of whether the child has a guardian; (11)
available in the future due to changes in SSI or Medicthe trust protects the special-needs child’s inheritance
aid funding, budget cuts, eligibility requirements, etc.
from being seized by his or her creditors and avoids
Even if the special-needs child does not receive needthe imposition of a Medicaid lien; (12) the trust can be
based government benefits such as SSI or Medicaid,
“simple” or “sophisticated,” depending on the amount
and instead receives entitlement-based government
and type of assets that are used to fund the trust; and
benefits such as Social Security Disability Insurance
(13) most importantly, to ensure that there is never
benefits and Medicare, a supplemental needs trust
a time when the child’s needs are not met—that is,
will always protect the special-needs child from his or
resources are available in a seamless way. An interher inabilities, disabilities, predators and creditors. A
vivos third-party supplemental-needs trust ensures that
third-party supplemental-needs trust can, at the same
funds are available to the special-needs child without
time, be both flexible and protective, and provides
disruption at the parents’ death.
asset protection for the special-needs child.
54
June–July 2008
The trustee of the third-party supplemental-needs
one, the inheritance should be left to a third-party
trust will act as a gatekeeper of the special-needs
supplemental-needs trust. A parent’s stand-alone interchild’s inheritance. The trustee will typically disvivos, third-party supplemental-needs trust can be
tribute money for permissible “extra” quality-of-life
structured to receive gifts, bequests and inheritances
items and services not provided for by government
from grandparents (and other relatives) for the benefit
benefits.20 These distributions will not jeopardize the
of the special-needs child. This avoids the grandparents (or other relatives) having to prepare a separate
special-needs child’s receipt of (or qualification for)
third-party supplemental-needs trust. See, Exhibit 3.
government benefits. Thus, the trustee “supplements”
the benefits provided by the government—hence the
name “supplemental-needs trust.” The trustee should
Undertake a Thorough Review
generally avoid making distributions that will reduce
of All the Parent’s Assets
SSI benefits or result in a loss of Medicaid cover21
age. Trust distributions for basic shelter, food and
A corollary to the need to coordinate a specialdirect payment of cash to the special-needs child
needs child’s inheritance with other relatives is
will reduce or eliminate
the need to review all
the child’s SSI benefits,
possible ways a speAnytime you have more than one
and may result in a loss of
cial-needs child could
Medicaid coverage.
client, you must, of course, address receive property, an inIn order to assist the
heritance or a gift. For
any conflict of interest.
trustee of the third-party
example, the following
supplemental-needs trust,
assets (and applicable
a letter of intent 22 should be prepared by the parents.
beneficiary designations) should be reviewed to
make sure they will not be paid (or given) directly
The letter of intent serves as a blueprint that provides
to the special-needs child:
valuable information concerning the daily life and
IRA, 401(k) and other retirement benefits24
health care needs of the special-needs child. This is
especially
y important when a new caregiver has to step
Life insurance (including employer provided life
in
manage
insurance) benefits
n and
d ma
anagge the child’s day-to-day activities. The
letter
Accidental death and travel insurance benefits
lettter of
o intent
in
ntentt also
a provides
ovides information
nforma ion concerning
con
thee unique
needs,
preferences
provided through credit cards when a person purun
niqu
ue likes,
like dislikes,
sli
nee
referenc and
other
concerning
chases a plane ticket, etc. using that credit card
oth
her critical
critiical information
in mat
on
ng the specialneeds
child—all
of which is helpf
helpfull to the trustee
Annuities
neeeds chi
ld—a l o
ld—
and the
Savings bonds
th
he caregiver.
ca
are
Caution: When making
Any
property
will or trust
g distributions
ri u o from
om tthe thirdA
yp
p y not subject
bje to the parent’s
p
party supplemental-needs
UGMA
UTMA accounts
eds trust,
st, the trustee
trustee needs to
U
GMA or UTM
ccounts
be aware of the impact the distributions may have
TOD, POD, ITF designations on accounts, savings
on the child’s continued eligibility for government
bonds, or securities
benefits, such as SSI and Medicaid.
Inheritances, gifts or bequests through another
person’s will or trust (if not paid to a supplemental-needs trust)
Coordination of the SpecialDeeds
Needs Family’s Estate Plan with
Joint accounts
Jointly owned property, including jointly owned
Other Relative’s Estate Plans
real estate
Final paycheck (including unused vacation and
The principle purpose of a third-party supplemensick pay)
tal-needs trust is to provide an inheritance for the
Collectibles, antiques and family heirlooms
special-needs child without risking the loss of imporPersonal injury and wrongful death proceeds paytant government benefits such as SSI, Medicaid, etc.
able to a parent’s estate (in contrast to personal
Consequently, it is important that grandparents and
injury and wrongful death proceeds payable, by
other relatives not leave an inheritance outright to a
law, directly to the special-needs child)
special-needs loved one.23 Therefore, rather than leavCaution: This list is not exhaustive.
ing an outright inheritance to a special-needs loved
JOURNAL OF PRACTICAL ESTATE PLANNING
55
Special Planning Is Needed for Families with a Special-Needs Child
Financial Planning Issues for
Special-Needs Families
Pooled Account Trust” established pursuant to 42
USC 1396p(d)(4)(C) also commonly referred to as a
“(d)(4)(C) trust”.29 Such trusts are collectively referred
to as “OBRA 1993 Special-Needs Trusts” in referFinancial planning for a special-needs family’s future
ence to the law (the Omnibus Budget Reconciliation
should be considered as a part of the overall estate
Act of 1993) that established the use of these trusts
planning process,25 and should be undertaken when
to preserve Medicaid eligibility, and subsequently
the parents know the extent of their child’s disabiliclarified to preserve SSI eligibility.
ty—if not sooner.
Life insurance (typically other than term-life insurThe Medicaid Payback Trust. In the case of
ance) 26 may be one of the most cost effective (and
the Medicaid Payback Trust, the special-needs
child’s parents, grandleast expensive) ways to
parents, legal guardian
ensure that the specialor the court establishes
needs child will receive an
As part of the estate planning
the trust, which must
inheritance—as adminisprocess,
parents
of
a
special-needs
be irrevocable, and be
tered through a third-party
for the sole benefit of
supplemental-needs trust.
child should become familiar with
the special-needs child
On the other hand, 401(k),
services that are provided for
during his or her lifeIRA and other types of redevelopmentally
disabled
persons
time.30 After the trust is
tirement benefits [possibly
other than income tax-free
approved by the court,31
by their state’s Department of
Roth IRA, Roth 401(k) and
the special-needs child’s
Community Health, and parents
Roth 403(b) retirement acdisqualifying assets are
should
attempt
to
maximize
count benefits], if paid to a
transferred into the trust
those resources.
third-party supplementalby the child (if compeneeds trust, may be an
tent), the child’s guardian
inefficient and (income)
or by court order.32 The
tax
expensive
method of providing an inheritance for
trustee of the Medicaid Payback Trust is authorized
axx exp
penssive m
the
special-needs
since retirem
retirement
benefits are
to pay for the permitted supplemental needs of the
e spe
eciaal-neeed child
d sinc
ent ben
subject
tax and income tax.27 A
child. With proper planning, family members may
sub
bjecct to both
h ffederal
al estate ta
(depending on state law, and depending on the
competent
nancial pl
plannerr w
who is experie
experienced in
co
ompe
etent fi
fin
nan
n
HUD Section 8 Housing rules concerning OBRA
working
wo
orkin
ng with
w sspecial-needs
peci -needs families
amilies can be of great
1993 Special-Needs Trusts) be able to serve as
help
provide valuable assistance.
p and
a p
pro
the trustee
(or cotrustee)
Payback
t
ee) of the Medicaid
M
y
Trust;
should
drafted
minimize
Tru
st
and
the
trust
ould
be
d
a
ted
to
m
in
im
Dealing with Ass
Assetss Alread
Already
dy
potential adverse tax consequences and conflicts of
Owned by a Special-Needs Child interest when a family member serves as a trustee
or cotrustee. Upon the death of the child, the trust
If a special-needs child who is disabled [as defined
must first reimburse the government for medical
by Social Security pursuant to 42 USC 1382c(a)
benefits provided by any state’s Medicaid program
(3)] has received (or has a vested non-contingent
to the special-needs child. Any remaining trust
right to receive) an inheritance, gift, bequest, lawproperty (after each state has been reimbursed) is
suit award or settlement, child support, alimony
distributed to the trust’s “remainder” beneficiaries
or divorce property settlement, the child’s receipt
[usually the special-needs child’s then living deof these assets may result in the disqualification of
scendants (if any), or the special-needs child’s then
need-based government benefits such as SSI and
living siblings].
Medicaid.28 In order to preserve these government
In order to establish a Medicaid Payback Trust, the
benefits, the child’s disqualifying assets should be
special-needs child must: (1) be disabled pursuant to
converted into exempt (or noncountable) assets or
the Social Security definition of “disability,”33 and (2)
be transferred to either: (1) an inter-vivos irrevocable
“Medicaid Payback Trust” established pursuant to 42
be under the age of 65 at the time the trust is estabUSC 1396p(d)(4)(A) [also commonly referred to as
lished and funded. Also, no contributions to the trust
a “(d)(4)(A) trust”], or (2) an inter-vivos “Community
can occur after the child reaches age 65.
56
June–July 2008
The Community Pooled Account Trust. In the case
of a Community Pooled Account Trust, a nonprofit
charitable organization establishes and manages a
master trust.34 The special-needs child, the child’s
parents, grandparents, legal guardian or the court
establishes a trust account (within the master trust)
solely for the benefit of the special-needs child, who
must be disabled pursuant to the Social Security
definition of “disability.”35 (The special-needs child
generally can be of any age to use a Community
Pooled Account Trust, although some states penalize
a child if he or she makes contributions to the trust
after the child reaches age 65.) The special-needs
child’s disqualifying assets are then transferred into
the master trust, 36 and a separate trust account (also
known as a “subtrust account”) is established by
the charity for the sole benefit of the special-needs
child (but, for purposes of investment and management of funds, the master trust pools all the separate
trust accounts). The charity, as trustee, administers
the child’s trust account and uses it to pay for the
permitted supplemental needs of the child. Family
members or friends can act as “advisors” to the
trustee-charity concerning the needs of the child.
Depending on the terms of the master trust and the
joinder agreement
that establishes the child’s sepag
rate
atte trust
tru
ust account,
aacco
ou any funds remaining in the child’s
separate
trust
account at the child’s
death
will, either:
sep
paraate tr
rust aac
hild’s d
eath wil
(1)) be kept
kept by the
th charity
ari (and
d not
n used
ed to reimburse
re
benefi
ts provided by any
thee government
go
govvern
ern
nment for medical
med
be
state’s
taate’s
ate s Medicaid
Med
dicaaid program
pro ram to the
he special-needs
spec al-need child);
or (2)
used to first reimburse the government for
2) be u
use
medical benefits provided by any
any state’s
e s Medicaid
M
program to the special-needs
child, an
and
remainnee child
d tthe
he rem
ma ning amount of the special-needs child’s
h d separate
trust account will then be distributed: (1) pursuant
to the court’s order that established the child’s trust
account, (2) pursuant to the child’s exercise of a
testamentary limited power of appointment (which
limited power of appointment could be contained
in the child’s will, a court’s order or the joinder
agreement), (3) pursuant to the child’s will, or (4)
pursuant to the laws of intestacy.
A Community Pooled Account Trust is best suited
where the amount of nonexempt assets owned by
the special-needs child is not large enough to justify
the cost of establishing and administering a Medicaid
Payback Trust, or where the parents or child want to
ultimately benefit the charity upon the death of the
special-needs child.
Not all states have Community Pooled Account Trusts.
JOURNAL OF PRACTICAL ESTATE PLANNING
Medical Treatment and the
Adult Special-Needs Child
Under the federal Health Insurance Portability and
Accountability Act (HIPAA) 37 privacy rules, which
went into effect in April 2003, medical personnel
(such as doctors and hospitals) are not allowed to talk
freely about a patient’s medical condition, and they
can be fined or jailed for dissemination of any private
health information without the patient’s consent. This
applies to all patients over the age of 18, including
patients with special-needs.
Although the HIPAA privacy rules are well intentioned, they can have horrendous implications for the
medical care of an adult special-needs child if he or
she is unable to give informed consent and knowingly
participate in his or her own medical treatment.
If an adult special-needs child lacks the ability to
make informed medical or mental health decisions or
to give consent to the release of confidential medical
information, parents should consider these options:
(1) if the special-needs child is mentally competent
under applicable state law, have an estate planning
attorney prepare a durable medical power of attorney
that includes HIPAA release information and names
each parent as a “personal representative” under
the HIPAA rules so that a parent can legally request
and receive confidential medical information, or (2)
if the special-needs child is mentally incompetent,
obtain a guardianship over the special-needs child
for medical treatment purposes.
Asssisting th
Assisting
the
e Ad
Adult
ult S
Specialp ial
pec
Needs
Ne
ee
eds Ch
Child
hild in
n Fin
F
Financial
an
ncial and
d
Daily Living Matters
If an adult special-needs child is mentally competent under applicable state law, he or she should
have a general durable power of attorney (GDPA)
prepared by an estate planning attorney.38 Once the
child becomes an adult, a parent’s right to know,
monitor, advocate and intercede in the specialneeds child’s affairs may be limited or prohibited
absent the child’s consent, a court order (such as a
guardianship), or a GDPA. A GDPA will permit the
person named as the power of attorney to assist the
special-needs child in his or her financial affairs. The
GDPA is highly recommended because it is the least
costly and least intrusive method of assisting the
adult child in his or her nonmedical affairs. When
57
Special Planning Is Needed for Families with a Special-Needs Child
the special-needs child dies, the authority given the
person named as power of attorney under the GDPA
automatically expires.
Additionally, a parent may become the “representative payee” of the special-needs child’s SSI, SSDI
and Social Security benefits, thus avoiding a court
appointed “guardian of the estate” or conservatorship, 20 CFR 404.2001–404.2065. A representative
payee is the Social Security Administration’s version
of a conservator/guardian of the estate (as concerns
the benefits in question), and the appointment of a
representative payee pre-empts the authority of a
court appointed guardian or conservator concerning
the benefits in question. However, as with a conservatorship or guardian of the estate, an annual report
must be filed with the Social Security Administration
documenting how the funds were used for the benefit
of the special-needs child.
Premature Death of
the Special-Needs Child
In addition to the normal grief associated with the
death of a child, a special-needs family may need
a source of additional finances to assist in the transition following the death of their child. Besides
the
obvious
expense of a funeral, the family may
he
e ob
bvious eex
have
the
(expensive)
no
o longer
lon
ngerr hav
ve need
d for th
e (expe
nsive) aadaptive
vehicle
they
recently
purchased
installment
ve
hicle th
hey rrec
yp
ase (on an inst
loan
basis).
Typically
depreciate
loa
an basi
b
is) T
is).
Ty
p lly such
h vehicles
les dep
more
rapidly
noncustomized
vehicles and
mo
ore rap
idly
y than
han noncus
omized vehic
are di
diffi
cult
fficu
ult to sell. Durable medical equipment
that became a fi xture in th
the family
home may
am
ho
y
need to be removed, and thee house may
may need
neeed to
be remodeled in order to make it more attractive
for resale. The best approach to provide for these
potential expenses is for the parents to purchase a
rider to their life insurance policy that also insures
the life of the special-needs child. Or, if a rider is
not available, the parents may be able to purchase
a life insurance policy on the life of their specialneeds child. Since the special-needs child is not
the owner of the policy and would not be the
beneficiary of the policy, there would be no SSI
or Medicaid disqualification (or asset cap/income
issues) concerning the life insurance policy. If the
life insurance policy pays dividends, the policy
owner may be able to use the dividends to purchase
paid up additional coverage without proof of the
special-needs child’s insurability, thereby providing
a larger death benefit amount.39
58
Becoming Familiar with
Community-Based Resources
As part of the estate planning process, parents of a
special-needs child should become familiar with services that are provided for developmentally disabled
persons by their state’s Department of Community
Health, and parents should attempt to maximize
those resources. Parents should also consider membership in a community-based advocacy group,
such as their local ARC—formerly known as the
“Association of Retarded Citizens” (www.thearc.
org). Additionally, parents should seek to identify
social, recreational, vocational, housing and other
community-based resources that would be beneficial
and lead to an increased sense of fulfillment and
security for their special-needs child. Parents should
seek to fully integrate the special-needs child into the
local community to the fullest extent possible and
as soon as practicable. Too many parents wait until
the last possible moment (i.e., on their death bed
or upon entering a nursing home) to integrate their
special-needs child into the local community. Such
a delay can be disastrous to both the parents and
the special-needs child, whose life and daily needs
have centered around his or her (now deceased or
disabled) parents.
This Family Is Different
So far the discussion has been on the “hard” side of
planning for families with a special-needs child—
wills,
wil
s trusts,, life insurance,
anc , community
m
y resources,
etc. G
Generally
etc
enerally speaking,
spea ng, the
he “hard”
“har ” side
s de is where
wh
practitioners are most comfortable
f
b since it involves
technical issues—the bailiwick of the attorney.
The “soft” side of planning for a special-needs family is far more difficult since it involves family and
marital dynamics. Many practitioners may not have
the experience or training to identify and deal with
the “soft” side issues associated with a special-needs
family. In estate planning (perhaps more than any
other area of law, with the exception of family law),
it is important to know and understand one’s client
and their family’s dynamics.
Since each family is unique,40 what follows is
a generalization (and in some instances an oversimplification) of some of the “soft” side issues (i.e.,
personal and family issues) confronting a specialneeds family.41 With that said, let us proceed to
discuss some of the personal issues clients with
June–July 2008
special-needs children face. We are, after all, more
than just attorneys—we are also counselors.
Guilt, Anger and Grief
Many parents may harbor guilt, anger or grief about
their child’s special needs. Why me? 42 What did I
do wrong? What did I do to deserve this? Why did
God allow this to happen to me? These questions
are quite normal. But left unresolved, guilt, anger and
grief can affect (and afflict) the psychological health of
the parents and other family members. (Parents may
not even be aware of their guilt or anger.) Counseling
and support groups can be helpful.43
Excessive Optimism
Another potential cause for a parent’s anger is excessive optimism. (This is an issue regarding children
who appear normal at birth, but who begin to manifest various deficits as time goes on.) Undue optimism
can lead to unrealistic expectations that result in
frustration and anger.
For whatever reason, some physicians today
may de-emphasize the severity and prognosis of a
special-needs child. (Or it may be that the parents
subconsciously “hear what they want to hear” from
the doctors and ignore the rest.) This can cause parents
develop
nts to
o de
velo
op unrealistic assumptions concerning
their
the
eir special-needs
special-n
nee child.
hild. They
Th y want
wan a miracle;
mirac they
need
ne
eed a miracle;
mirraclee; medicine
m ci can
n do
d miracles;
acles; therefore,
th
they
for
the
e hope
ey
h e that
thaat medicine
ici can
an deliverr a miracle
mir
their
heeir child.
cchild
d. With
Wit
W h the
th right doctors
d ctors and
and with aggressivee intervention,
their child will be the “exception
in
nterv
ven
to the rule,” right?
Accordingly, the parents
everything
ents commit
ommit to do every
h ng
they can for their child:
d the best doctors, the
h best
hospital, years of physical and occupational therapy,
IDEA plans, and follow up meetings with school
teachers and administrators. All of these are good
and helpful.
But disappointment may loom on the horizon.
As the child progresses through school, testing will
(hopefully) reveal the child’s true capabilities and inabilities so that the parents are not surprised to learn
that their child is not an “exception to the rule.” In
fact, their child’s test scores are within normal range,
given the child’s abilities. Their child has hit the “glass
ceiling.” Their child is, as some well-meaning but
ill-informed people in this culture still say, “handicapped.” Having worked so hard and so long to
make sure the child received the best that medicine
and the schools had to offer, the parents can become
JOURNAL OF PRACTICAL ESTATE PLANNING
disillusioned and frustrated. Their child has reached
the plateau; their child will not “get better.”44 This
is a bitter pill, one that is difficult for many parents
to swallow.
That’s not all. The parents’ frustration and anger are
exacerbated when they learn that the unemployment
rate for special-needs adults (even for those who function at a relatively high level) exceeds 75 percent. They
then realize, perhaps for the first time, why Medicaid
is so important: it pays for health care (unless private
pay is available through the parent health insurance
policy) along with many ancillary services such as
personal care attendants, chore care, housing, etc.45
Thus, it is critical that the child become eligible for
Medicaid. This, to the dismay of some parents, means
this: their child may have to remain “impoverished”
(subject to certain work “income” exceptions) under
the rules governing SSI. It is at that time that they may
make an appointment with you to discuss a specialneeds trust for their child’s inheritance.
It may be that the parents retain you while their
child is young. Then it is incumbent on you, as their
trusted advisor, to understand that these parents, like
many others, may have unrealistic hopes for their
child. Of course you should encourage them to obtain
the best health care and educational opportunities
for their child. At the same time, you may wish to
caution them against believing that their child will be
the “exception to the rule.” This requires a delicate
balance between empathizing with your clients and
gently confronting them with the reality that their
child will never be “normal.”
Depression
n
You may be the only person to whom
h
your clients will
entrust their deepest hurts, fears and disappointments.
At one time or another, it is not uncommon for a parent of a special-needs child to become depressed,
maybe clinically so. All parents have dreams for their
children. When the parents finally realize their child
will never fulfill those dreams, discouragement and
depression may follow. As attorneys and counselors,
we know that serious depression can lead to a host of
negative consequences, including job loss, divorce,
even (God forbid) suicide.
Also, an emotionally unstable parent might vent
frustrations in a destructive manner, perhaps by
abusing a spouse or maybe even the children. Be
on guard for any evidence of this. And be prepared
to help your clients obtain whatever mental health
support they need.
59
Special Planning Is Needed for Families with a Special-Needs Child
Marital Relations
The divorce rate for parents of a special-needs child is
extraordinarily high. This should come as no surprise.
The divorce rate is nearly 50 percent to begin with. It
is stressful to raise healthy children; it is much more
stressful raising a special-needs child. Add to this
the guilt, anger or depression that one of the parents
may already be experiencing and you have a recipe
for marital trouble.
Anytime you have more than one client, you must,
of course, address any conflict of interest. Likewise,
when advising parents of special-needs children, you
must determine if there is a potential conflict. Inquire
whether the marriage is stable; be aware that it may
not be. In other words, do not ignore the conflict of
interest issues that are present anytime you advise
more than one client. Discuss the possibility of a
conflict of interest in your initial meeting and if there
is no current conflict—have your client acknowledge
that in your engagement-retainer agreement.
Few parents have any training raising a specialneeds child. Even if the parents have a medical or
educational background in special needs, there is a
big difference between raising their special-needs
child versus caring for someone else’s. Raising your
own special-needs
child, often with little community
p
support,
up
pport,
rt iss a tall
taal order for any parent. The child’s needs
always
present,
paramount.
Frequently there
are
e alw
wayss pre
ese often
en para
mount. Frequen
whatever
is no respite.
resp
pite. (And
(A
wh
er help the
he family
fam does
eventually
eev
entu
ent
ually
ally receive
reccei from
om the government
gov
ent often comes
only
on
nly after
affter paperwork
p
papeerwor and delay,
de y, and more paperwork
pap
and more
delay.)46 Stress is inevitable.
m
de
Moreover, if either parent has
or
h s unresolved
n olved guilt
g
anger or grief, this can
marriage
(more
n iinfect
ct the ma
rr age (m
m re
stress). Often, it is the husband who withdraws
hd
from the marital relationship and files for divorce.
It seems that many fathers, for whatever reason,
have a hard time accepting and bonding with their
special-needs child.
Men tend to internalize their emotions and many
are ashamed of their inability to cope with the stress
of raising a special-needs child. (A man may also
resent the amount of the time his wife devotes to the
child.) Convinced they do not have a safe outlet to
deal with their emotions, some men may be unable
or unwilling to acknowledge their own weakness.
This is no small issue.47
Women, on the other hand, are less likely to “go
it alone.” Generally with some exceptions, women
have better support networks than men; they have
closer friends than men do. Perhaps this is because
60
women are willing to share their feelings, whereas
men often are not. Many women are able to find
support quickly, constructively and effectively. Men,
generally, do not.
Even under the best of circumstances, raising a
special-needs child exacts a physical, emotional
and financial toll on a marriage and the family. The
amount of family resources (time, energy, emotions,
money) spent raising a special-needs child is usually
far greater than for a healthy child. Doctor visits,
physical and occupational therapy, surgeries—they
all require time, energy and money. The family’s
money—and the parents’ energy—can become exhausted. Depleted of physical and emotional energy,
the husband may forget his wife’s needs, and she his.
It takes work to make a marriage work, and it is hard
for parents to work on their marriage when they are
bereft of energy at the end of each day from caring
for a special-needs child.48
Siblings
Sibling conflict is present in every family with more
than one child. Families with a special-needs child
are no exception. In fact, the tension can be worse.
How to care for all the children can become contentious (resulting in more stress on the marriage) when
the children are close in age. In that case, the needs
of the healthy children can be “put on hold,” while
the parents’ energies are focused on their sibling’s
special needs. This may cause resentment by the other
children. To minimize this, the parents must cultivate
a positive and loving attitude toward their specialneeds
without neglecting
nee
d child and do so wit
g
gl
g their other
children.
chi
d en. Inevitably
Inevitab y there
ere iss tension:
tension there
there iss only so
much
for parents to spend
h time available
l
d with their
children. Yet, if the parents ignore the healthy children for the sake of the special-needs child, the other
children may simply resent their special-needs sibling
and may eventually resent the parents as well.
As the parents age, one issue (usually unspoken)
looms larger and larger: “Who will take care of our
special-needs child when we are unable to do so?”
Many special-needs children cannot live on their own
or in a group setting. What to do? One alternative is
to arrange for the special-needs child to live with a
sibling. Although often assumed to be the best solution, this actually may create other problems. Most
adult siblings have their own families who require
their time and attention. Moreover, caring for an
adult special-needs sibling can strain the sibling’s
marriage. Therefore, parents should not assume that
June–July 2008
a sibling will care for a special-needs brother or sister when mom and dad cannot. Thus, parents need
to become familiar with community resources and
begin transitioning their adult special-needs child
into the community (and out of the parents’ home)
as soon as practicable. This is often part of specialneeds planning.49
Spiritual Issues
“I used to believe in God; I can’t anymore,” may be a
lament you hear from one of your clients. Doubting
God may, in turn, lead to guilt or depression for the
client. The client may, in turn, abandon attending
the house of worship at the very time when the client most needs spiritual advice and encouragement.
You can help. If your clients have spiritual advisors,
recommend that your clients seek their help. Most
clergy are trained to deal with a crisis of faith and
they are not surprised by it. Advising parents of
special-needs children is often a team effort, one that
involves the attorney, counselors, special education
teachers, clergy, school administrators, financial planners and insurance agents along with the physicians
and therapists.
The author has a deeply committed religious faith
that has helped him and his family weather the
storms
to
ormss of life,
llife iincluding those that come with raising
experience, one
a spec
sspecial-needs
ial-n
need
ds cchild. In the author’s
uthor’s experien
things
generally
couple of
of two
o thi
ngs ge
ally happens
pe when
en a co
faith
has a special-needs
fai
th h
spec
ee child:
ild either
er they will become
disenchanted
God
their faith
co
ome dise
ench
hanted with Go
d and “lose”
ose” th
or they
heyy draw
draw closer to God and become stronger in
their faith. As Billy Graham h
hass stated
many
ta
m
man
y times,,
“God does not reveal to
reasons
the
‘why’s’
o us the
e reaso
ons ffor
or th
e ‘wh
’s’
of life, but He does say, ‘You can trust me.’” Holding
onto Almighty God and trusting His providence has
given the author the hope that has seen him through
the dark night of the soul.
Final Advice: What Not to Do
What should an attorney not do when advising parents of a special-needs child? First, do not assume
that this family is like other families. Every family is
different; a special-needs family certainly is. Second,
never say, as many do: “What a blessing it must be
to have a special-needs child!” This remark, although
said in good faith, is naïve and flippant. If said by an
attorney, it will immediately telegraph to the clients,
“This lawyer really doesn’t have a clue what we are
going through.” The child is a blessing from God,
of course; every child is. That said, having special
JOURNAL OF PRACTICAL ESTATE PLANNING
needs is not a blessing, any more than any physical or emotional malady is. It is good health that is
a blessing. Although a special-needs family learns
and experiences many things that they would not
otherwise, any parent would prefer to have a healthy
“normal” child. And the special-needs child would
prefer to be “normal” and healthy, too.
Conclusion
Estate planning for the special-needs family is the first
of many steps that needs to be taken by parents in
their journey of caring for all their loved ones. Financial planning, retirement planning, housing issues,
caretakers, personal assistants, etc. also need to be
considered, especially as this pertains to a specialneeds child. Estate planning is a starting point, not
the end all. Competent legal counsel along with other
professionals can guide the parents along the way. “It
takes a team to plan for a special-needs child.”
Exhibit 1
Sample language for inclusion in a parent’s general
durable power of attorney for financial affairs: 50
Power of Agent Concerning My Children. My
Agent shall have the power to pay to or apply for the
benefit of my minor children (or pay to or apply for
the benefit of my adult children who are dependent
upon me for their support or otherwise unable to be
self-supporting due to illness, physical limitations
or mental limitations as determined by my Agent in
its sole,
o , absolute and uncontrolled
nc
d discretion), such
amounts
Agent,
Agent’s
absolute
am
ounts as my A
ge in my Agen
’s sole, absol
and uncontrolled
d discretion, may from time to time
determine. My Agent shall have the absolute right
to refuse to make any payment to or for the benefit
of such child, and neither the child nor any representative of the child shall have the right to demand
any such payment from my Agent. If such child is
receiving or is otherwise eligible to receive SSI and/
or Medicaid (or other similar government benefits)
payments by my Agent to or for the benefit of such
child shall supplement (and not supplant) such government benefits. Also, if a child of mine is receiving
or is otherwise eligible to receive SSI and/or Medicaid (or other similar government benefits) my Agent
may establish and fund with my assets, an inter-vivos
third-party discretionary non-support supplementalneeds trust with spendthrift provisions for the sole
benefit of such child for the child’s lifetime, and
61
Special Planning Is Needed for Families with a Special-Needs Child
upon the death of that child, the trust residue shall
be distributed to my then living descendants by right
of representation.
Exhibit 2
Sample language for inclusion in a parent’s revocable
living trust: 51
Power of Trustee Concerning Distributions for the
Benefit of My Children. During any period which
I, Jane B. Doe, am incapacitated or incompetent,
Trustee, may, in its sole, absolute and uncontrolled
discretion, distribute to or apply for the benefit of my
minor children (or pay to or apply for the benefit of
my adult children who are dependent upon me for
their support or otherwise unable to be self-supporting
due to illness, physical limitations or mental limitations as determined by Trustee in its sole, absolute
and uncontrolled discretion), such amounts of the
trust’s income and principal as Trustee shall determine. Trustee shall have the absolute right to refuse
to make any distribution to or for the benefit of such
child, and neither the child nor any representative
of the child shall have the right to demand any such
distribution from Trustee. If such child is receiving or
is otherwise eligible to receive SSI and/or Medicaid
(or
orr other
oth
her simi
ssimilar
l government benefits) distributions
byy Trustee
Trusteee shall
shaall supplement
ement (and
and not
no supplant)
suppla such
government
go
overn
nmeent benefi
ben ts..
b
Transfer of Trust Estate Residue to Supplemental
Needs Trust. Upon my death and after the proper
administration of the trust estate, Trustee shall distribute the residue of the trust estate to the then acting
trustee of The Jane B. Doe Supplemental-Needs Trust
FBO [name of special-needs child], dated March
1, 2008, to be held, administered and distributed
in accordance with the terms of said supplemental
needs trust.
Exhibit 3
Sample pour-over language for inclusion in a relative’s will or trust where a bequest or inheritance
would otherwise be payable outright to a specialneeds relative: 52
Special Provisions Concerning Distribution of
Property to a Disabled Relative. If any property
would otherwise be distributable to my [nephew,
niece, grandchild, etc.] whose name is [name of
disabled relative], my fiduciary shall not distribute the property to the aforesaid individual (or to
that individual’s guardian or conservator) but shall
instead distribute the property to the then acting
trustee of The Jane B. Doe Supplemental-Needs
Trust FBO [name of disabled relative], dated March
1, 2008, to be held, administered and distributed
in accordance with the terms of said supplemental
needs trust.
ENDNOTES
1
2
For purposes
urpose of this article, “special-needs
child” refers to a child who (at birth
rt or
o
due to a subsequent illness or injury)
ury) is
mentally, physically or emotionally
otio
disabled, and because of the severity of the
disability may be eligible for need based
government benefits, such as Medicaid
and Supplemental Security Income. Typical
special-needs children include those with
cerebral palsy, autism, Fragile X syndrome,
Down syndrome, mental impairment, etc.
Such a child is legally referred to as a “developmentally disabled” individual.
Although the article generally cites national
treatises and articles, the practitioner should
be aware that state laws, rules and regulations intersect (i.e., explain or modify) many
of the federal government based programs
for special-needs children. Although government benefits such as Supplemental
Security Income and Medicaid are federal
programs, they are implemented at the state
level, and the administration and rules of
eligibility may vary from state to state. Thus,
this article, all treatises, articles, sample
62
3
4
forms and sample drafting language must be
re
d interpreted and adapt
d to applicable
read,
adapted
fe
dera and sta
te la
ule and
n regulations.
regulations
federal
state
law, rules
Fo
amp e, some
ome states
tes h
ave statutes
stat es tha
For ex
example,
have
that
expressly permit third-party supplementalneeds trusts (e.g., Ohio, Wisconsin, California, Missouri, Illinois, Texas and New York).
In other states, such as Michigan, third-party
supplemental-needs trusts are creatures of
case law. See, e.g., Carol Miller v. Department of Mental Health, 432 Mich. 426, 479
N.W. 2d 617 (1989).
This unique challenge raises other important
issues, such as: (1) how to treat the other
children equitably while providing for the
special-needs child, (2) how to make sure
there are sufficient funds available at a
parent’s death to care for the special-needs
child, and (3) how to provide for the proper
supervision, management and distribution of
an inheritance for the special-needs child.
SSI is a federal income supplement program
administered by the Social Security Administration. SSI is funded by general tax revenues
(not Social Security taxes). SSI is designed
5
to help aged, blind and disabled individuals w
who have limited
ite income and limited
resources.
ources SS
SSI pr
provides
v des a mod
modest
est mon
monthly
stipend
end (which
which most
mos stat
statess su
supplement)
pplemen to
meet basic needs for the individual’s food
and shelter. In many states, an individual
who qualifies for SSI automatically qualifies
for Medicaid, and may also be eligible for
food stamps. 42 USC 1381 et. seq.; 20 CFR
416. See Lawrence A. Frolik and Melissa C.
Brown, ADVISING THE ELDERLY OR DISABLED CLIENT
(2nd Edition, Supp. 2007), at Chapter 5.
Medicaid is a joint federal-state funded
program that provides certain medical
assistance-health care benefits to the aged,
blind and disabled who are impoverished,
including those receiving SSI. Although the
federal government provides substantial
funding for Medicaid and establishes general (minimum) guidelines for the Medicaid
program, each state sets its own guidelines
regarding eligibility and services, which can
be broader but not more restrictive than the
federal (minimum) guidelines. Some states
offer more benefits and coverage than other
June–July 2008
6
7
8
9
10
11
12
states. However, because Medicaid is a state
administered program, eligibility for Medicaid benefits depends on the individual’s state
of residency. See, Chapter 14 of Lawrence
A. Frolik and Melissa C. Brown, ADVISING THE
ELDERLY OR DISABLED CLIENT (2nd Edition 2007).
for a discussion of Medicaid.
“If you fail to plan, you have planned to fail.”
Such are those who rely on an estate plan
created by the government.
The parent’s GDPA should permit the agent
to make discretionary nonsupport distributions to or for the benefit of the special-needs
child, and to establish a supplemental needs
trust for the benefit of the special-needs
child. See, Exhibit 1.
During a parent’s period of incapacity, the
parent’s revocable living trust should contain
language that permits the trustee to make discretionary nonsupport distributions to or for
the benefit of the special-needs child. Upon
the parent’s death, the special-needs child’s
inheritance should be distributed to a thirdparty supplemental-needs trust previously
established by the parent. See, Exhibit 2.
See, Section IV.
It is the author’s experience that some
attorneys who prepare estate plans for
special-needs families do not always have a
comprehensive background in income and
transfer tax law—beware and be advised.
See, Alan Acker, Income Taxation of Trusts
and Estates; 852-2nd, T AX M ANAGEMENT ,
and Howard Zaritsky, Grantor Trusts: Sections
ions 671–6
671–679
6
679
9 , 858-2nd, TAX MANAGEMENT,
for
f a discussion
discu
ussion
n of
o the income tax issues
concerning
c
conce
erningg trusts.
trussts. See also,
lso, Moo
Moore
e and
LLandsman,
Lands
sman, Plann
Planning
ning for Disa
Disability, 816,
16 TAX
MANAG
ANAGEMENT
GEMEN
NT. Section
Secctio VI, F, for
f an overview
er
of
o common
com
mmon
n income
inco
ome tax
ta issues
ues concerning
conce ning a
special-needs
specia
ial-nee
l eds
d ch
child.
h
The five
e o
options are: (1) distributing assets outright to the special-needs child
chil
(not recommended since the
e aassetss may
disqualify the child from receiving
eceiv
need
based government benefits), (2) disinheriting the special-needs child (generally not
recommended since the child will have
no safety net if government benefits are
subsequently reduced or eliminated), (3)
leaving property to another family member
with the understanding that the property will
be used for the benefit of the special-needs
child (generally not recommended since the
arrangement is not legally enforceable and
the sibling’s creditors (including a potential
exspouse) may be able to seize the assets),
(4) establishing a third-party discretionary
support trust for the special-needs child
(generally not recommended since the trust
will, in many states, disqualify the child from
receiving need based government benefits),
and (5) establishing a third-party supplemental-needs trust for the special-needs child
(highly recommended since the trust, if not
properly drafted and administered, will not
13
14
15
16
17
18
disqualify the child from receiving government benefits).
A trust established by and with the assets
of some one other than the special-needs
child (or the special-needs child’s spouse)
is considered to be a third-party trust. A
typical third-party trust is one established by
the parents of the special-needs child that
is funded with the parents’ assets (and not
with the assets of the special-needs child).
A trust established with the assets of the
special-needs child (such as an inheritance,
gift, bequest, alimony or lawsuit settlement
received by or payable to the special-needs
child) is considered to be a first-party trust
or a self-settled trust, even though the trust
is established by a third party pursuant to 42
USC 1396p(d)(4)(A) or 42 USC 1396p(d)(4)
(C). See, Section VIII.
See, Thomas D. Begley, Jr. and Andrew H.
Hook, REPRESENTING THE ELDERLY OR DISABLED
CLIENT: FORMS AND CHECKLISTS WITH COMMENTARY (Supp. 2007) at ¶ 16.01; and Clifton
B. Kruse, Jr., THIRD-PARTY AND SELF-CREATED
TRUSTS: PLANNING FOR THE ELDERLY AND DISABLED CLIENT (3rd Ed. 2002) Chapter 3 and
Illustration 3-B, for sample third-party
supplemental-needs trust forms, all of which
must be tailored to the specific needs of the
special-needs child and must comply with
applicable federal and state laws, rules and
regulations governing such trusts.
Who serves as the trustee of the stand-alone,
third-party supplemental-needs trust is important. The selection of the trustee involves
many
y considerations, including potential adverse tax
ta consequences if a family member
servess as a trustee. See, Sebastian V. Grassi,
JJr., A PRACTICAL GUIDE TO DRAFTING MARITAL
DEDUCTION
CT
TRUSTS (with Sample Forms and
Checklists),
kl
(2004, Supp. 2008), at Chapters
9 and 10, available online at www.ali-aba.
org/aliaba/BK36,
o g/a
for a disc
discussion
s
of trustee
selection
se ect on and
and related
rela
tax issues.
s es SSee
ee al
also,
so
Sebastian
Sebast an V.
V. Grassi,
rass Jr.,, Checklist
Check ist of
o Trustee
Truste
Duties and Common Mistakes Made by
Trustees, 31 TAX MANAGEMENT ESTATES, GIFTS
AND TRUSTS JOURNAL 239 (2006).
See, Uniform Trust Code (UTC) section 808,
available online at www.law.upenn.edu/bll/
ulc/uta/2005final.htm or www.nccusl.org.
For tax reasons, a trust protector should not
be “related or subordinate” to the settlor or
the trust beneficiaries, within the meaning
of Code Sec. 672(c). See. Revenue Ruling
2004-64, IRB 2004-27, 7.
It is very important that the trust contain
appropriate spendthrift provisions. See, UTC
sections 501 and 502.
Many of the benefits of a stand-alone,
third-party supplemental-needs trust also
apply to supplemental needs trust provisions that are contained in the parents’
revocable living trust, their irrevocable life
insurance trust, or their will (in the form of
a testamentary trust).
JOURNAL OF PRACTICAL ESTATE PLANNING
19
20
“Some state services are available to all persons in specified categories—e.g., mentally
ill or developmentally disabled persons—
but are free only to those who cannot afford
to pay. Among the most common services
in this category are state residential services
for disabled persons, which may be available
without regard to the recipient’s financial
status but also may subject the person
receiving the services, his or her estate,
or certain responsible relatives to a state
reimbursement claim to the extent of their
financial ability. This reimbursement requirement is commonly known as ‘cost-of-care liability.’ In some jurisdictions the amount and
duration of a parent’s liability for the cost of
services for children is limited and in most,
but not all, jurisdictions does not extend past
minority. However, the personal liability of
a disabled child is not similarly limited and
may continue as long as the child receives
the services. A child’s lifetime failure to pay
such costs may result in claims against his or
her estate. Not much can be done to avoid
parental liability in states in which it exists
(except for the parents to change their state
of residence or lobby for a change in the
law), but ordinarily it is possible for parents
to avoid giving or leaving assets to a disabled
child in a manner that exposes the child to
cost-of-care liability.” Ralph J. Moore, Jr. and
Ron M. Landsman, 816 TAX MANAGEMENT,
Section VI, B, 2 of, Planning for Disability.
(Citations omitted.)
Subject to applicable state law, a third-party
supplemental-needs trust can generally be
designed in two ways. The first (and more
traditional) way to design a third-party
supplemental-needs trust is for the trust to
be a discretionary nonsupport spendthrift
trust that expressly prohibits the trustee
from making any distributions that would
disqualify
qu
the special-needs
cia
child from government
men b
benefi
nefits
ts. T
The
e tru
trustt ex
expressly
pres ly sstates
thatt trust
trus distributions
distr but on are to
o supplement,
supplem
ment but
not supplant or replace government-public
assistance benefits available to the specialneeds child, to wit, the trust’s income and
principal cannot be used to provide basic
support (such as food and shelter) for the
special-needs child or for medical care that
is paid for by Medicaid. Also, the trust expressly prohibits the trustee from paying any
money directly to the special-needs child;
instead, trust funds must be distributed to
third parties to pay for goods and services
on behalf of the special-needs child.
The second (and more flexible) way to
design a third-party supplemental-needs
trust is to draft the trust as a pure discretionary nonsupport spendthrift trust without
any express restrictions on the trustee’s
payment of income and principal to or for
the benefit of the special-needs child. This
approach permits the trustee, in its sole,
absolute and uncontrolled discretion, to
63
Special Planning Is Needed for Families with a Special-Needs Child
21
22
23
24
25
26
make disqualifying transfers and distributions to or for the benefit of the specialneeds child if the trustee determines such
transfers and distributions are in the best
interests of the special-needs child (even
though such transfers and distributions may
result in a diminishment or elimination of
need based government benefits for the
special-needs child).
But see the preceding footnote for a discussion of permitting the trustee to make
discretionary transfers and distributions that
would reduce or eliminate the special-needs
child’s need-based government benefits.
For a sample checklist for preparing a letter
of intent, see, Peggy R. Hoyt and Candace
M. Pollock, SPECIAL PEOPLE, SPECIAL PLANNING
CREATING A SAFE LEGAL HAVEN FOR FAMILIES WITH
SPECIAL NEEDS (2003), available online at
www.specialpeoplespecialplanning.com).
A special-needs child can receive an outright
inheritance in indirect ways. For example, if
the grandparent’s will leaves his or her estate
to “my descendants, by right of representation,” and the parent of the special-needs
child predeceases the grandparent, actually
or presumptively under the requirement for
survival (typically 120 hours or 90 days for
generation-skipping transfer tax purposes),
a portion of the deceased parent’s share of
the grandparent’s estate will pass outright to
special-needs child, and possibly disqualify
the child from receiving certain government benefits. See, Section VIII, on how
to preserve
pre
eservee government
ggov
benefits when a
special-needs
s
specia
al-neeeds child
ch
hild receives an outright gift
or
o inheritance.
inh
heritan
nce.
S
See,
N
Natalie
e B. C
Cho
Choate, LIFE
FE A
AND DEATH
H PLANN
NING
F
FOR
RETIREM
ETIREMENT
MEN BENEFITS
FIT (6th Edition,
di
2
2006)
2006),, at Se
Section
ection
n 6.3.11,
6 3.11
.1 available at
a ww
www.
ataxpl
ataxplan.com.
t
llan.co
om.
See, Minoti
M
i H. Rajput, Planning for Families
of Children with Disabilities, J. FINANCIAL
NANCIA
PLANNING, August 2001, for a general
gen
overview of the financial planning
ng aaspectss for
a family with a special-needs child, available online at www.fpanet.org/journal/
articles/2001_Issues/jfp0801-art9.cfm.
Term-life insurance is an inexpensive way
to replace lost income due to the premature
death of a wage earner (such as a father), or
as an inexpensive way to provide income to
pay for the cost of a replacement caregiver
if the primary caregiver (such as a mother)
dies prematurely. However, term-life insurance becomes more expensive as the
insured becomes older. In the case of annual
renewable term-life insurance, the premium
amount increases each year. In the case of
term-life insurance for a fixed number of
years (such as a 20- or 30-year level termlife insurance policy), the premiums will
increase dramatically at the end of the 20or 30-year period, and the insurance cost
generally becomes prohibitive. Term-life
insurance is designed for a specified term
64
27
28
29
30
31
of years—it is not designed to provide an
inheritance. Permanent life insurance that
provides a cash surrender value, such as
whole life, universal life, or variable universal life is, however, designed to replace
lost income and to provide an inheritance.
See, Sebastian V. Grassi, Jr., A PRACTICAL
GUIDE TO DRAFTING IRREVOCABLE LIFE INSURANCE
TRUSTS (WITH SAMPLE FORMS AND CHECKLISTS)
(2nd Edition 2007) at Chapter 16, available
online at www.ali-aba.org/aliaba/BK45, for
an overview of life insurance policies.
Because retirement benefits constitute “income in respect of a decedent” under Code
Sec. 691, there is no step-up in basis for
retirement benefits when a participant dies,
and the recipient of the inherited retirement
benefits has to pay income tax on those
benefits as they are received. Furthermore,
if a trust is the recipient (or beneficiary) of
the retirement benefits, the compressed
income tax rates for trusts, which reaches
35 percent at $10,700 of taxable income
in 2008, are devastating and diminish the
amount of corpus available to the trust and
ultimately for the special-needs child.
See, Thomas D. Begley, Jr., and Andrew H.
Hook, Using Self-Settled Special-Needs
Trusts to Facilitate Matrimonial Settlements,
34 Estate Planning 42 ( 2007).
See, Bernard A. Krooks and Andrew Hook,
What Attorneys Need To Know About
Special-Needs Trusts, ALI-ABA Estate Planning Course Material Journal 5, October
2005; Thomas D. Begley, Jr., and Andrew
H. Hook, Drafting Issues in Self-Settled
Special-Needs
ia
Trusts, 31 Estate Planning 510
(2004); Thomas D. Begley, Jr., and Andrew
H. Hoo
Hook, When Is an Irrevocable SpecialNeeds
ds Trust Considered to Be Revocable?,
31 Estate Planning 205 (2004); and Andrew
H. Hook, What the Trust and Estates Lawyer
N
Needs
ed to Know about d(4)(A)
d(4)(A) Special-Needs
S
Tr
Trusts,
usts 29 A
ACT
ACTEC
EC JJournal
nal 192
92 (2003).
2003).
See,
Se
ee, C
Clifton
ifton B
B. Krus
Kruse, Jr.,
., THIRD
HIRD-PARTY
ARTY AND
ND SELF
SEL CREATED TRUSTS: PLANNING FOR THE ELDERLY AND
DISABLED CLIENT (3rd Ed 2002), at Illustration
3-C, for a sample form of a court created (d)
(4)(A) trust.
If a parent, grandparent or guardian establishes the trust, they should obtain court
approval to establish the trust (in order
to avoid the government subsequently
challenging the trust’s validity). “There is
a distinction here between creation and
funding of the trust. While any of the four
designated entities [to wit, parent, grandparent, guardian or court] can establish a
trust for the benefit of the [special-needs]
beneficiary, only the competent adult beneficiary, a guardian with court approval,
or a court with appropriate jurisdiction
can make a transfer of the [special-needs]
beneficiary’s funds to the trust, William L. E.
Dussault, Planning for Disability, 33 ACTEC
JOURNAL 42, at 61 (2007).
32
33
34
35
36
37
38
39
40
41
42
43
44
45
Because the trust is funded solely with the
special-needs child’s assets, the trust is considered to be a “first-party” or “self-settled”
trust. The estate, gift, generation skipping,
and income tax consequences of a first-party
trust are beyond the scope of this article.
Practice Point: In order to prevent the
funding of the trust with the child’s assets
from being a completed gift (of a future
interest) to the trust’s remainder beneficiaries, the special-needs child should retain a
testamentary limited power of appointment
over the trust assets. Reg. §25.2511-2(c).
When the child dies, the remaining assets in the
trust will be included in the child’s gross estate
for federal estate tax purposes. Code Sec. 2036;
LTR 200240018 (June 24, 2002).
42 USC 1382c(a)(3).
See, Clifton B. Kruse, Jr., THIRD-PARTY AND
SELF-CREATED TRUSTS: PLANNING FOR THE ELDERLY
AND DISABLED CLIENT (3rd Ed. 2002), at Illustration 3-E, for a master form of community
pooled account trust.
42 USC 1382c(a)(3).
Because the trust is funded with the specialneeds child’s assets, the trust is considered
to be a first-party or self-settled trust account. The estate, gift, generation skipping,
and income tax consequences of a firstparty trust account are beyond the scope
of this article.
42 USC 1320d; 45 CFR sections 160-164.
See, Andrew H. Hook, Durable Powers of
Attorney, 859 TAX MANAGEMENT, for a discussion of GDPAs and sample forms.
See, Sebastian V. Grassi, Jr., A PRACTICAL GUIDE
TO DRAFTING IRREVOCABLE LIFE INSURANCE TRUSTS
(WITH SAMPLE FORMS AND CHECKLISTS) (2nd Edition 2007), at 2.15, available online at www.
ali-aba.org/aliaba/BK45, for a discussion of
the income taxation of life insurance policy
dividends.
“Happy
ap families are
e all alike; every unhappy
family
mily is
i unh
unhappy
app iin its own way.” Leo Tolstoy,
y AN
NNA
NA KA
ARENINA
RENI A.
Generally, this section comes from the
author’s experience in advising parents of
special-needs children; from the personal experience of the author and his wife, a special
education instructor, with their special-needs
daughter; from the author’s observations of
numerous other special-needs families; and
from his independent research on specialneeds children and families.
According to the philosophy professor, the
answer is: “Why not me?”
One support group, Joni and Friends (www.
joniandfriends.org), has been an exceptionally valuable support for the author and his
special-needs family.
One of the potential consequences is the
child’s future financial needs. If only the
parents had purchased a permanent life
insurance product when they were younger
and healthier!
In some more affluent circles, just the word
June–July 2008
46
“Medicaid” evokes a negative response.
For some parents, the thought that their
child will be on “Medicaid” is demeaning,
especially considering all of the taxes the
parents have paid over the years!
The author, his wife, and his special-needs
daughter have found various special-needs
summer camps sponsored by the West
Ohio and Detroit Conference Outdoor and
Retreat Ministries of the United Methodist
Church, 309 N. Ballenger Highway, Flint,
Michigan 48504 (800) 334-0544 (http://
umccamps.org/mj1353.htm) to be excellent
“faith-based” programs that provide both
respite to the parents and a fun and loving
47
48
camp experience to special-needs children,
without regard to the parents’ or child’s
religious denomination. The camps truly
bless both the campers and their (volunteer)
buddies who assist the campers with their
special needs.
It is the author’s personal experience that
male support groups for fathers of specialneeds children are helpful, if not vital.
See, Nicholas R. M. Martin, STRENGTHENING RELATIONSHIPS WHEN OUR CHILDREN HAVE
SPECIAL NEEDS ( 2004). This book deals with
the impact a special-needs child has on the
family and, most particularly, the parents’
relationship. Subjects covered include
49
50
51
52
avoiding blame, support and guidance; sex,
affection, and intimacy; money matters; time
alone; effective communication; divorce;
and affordable child care. It even contains
a six-week program for couples.
For more information about siblings of individuals with a disability, see, Donald Meyer
and Patricia Vadasy, LIVING WITH A BROTHER OR
SISTER WITH SPECIAL NEEDS: A BOOK FOR SIBS (2nd
Edition, 1996).
The author makes no warranties or representations concerning the tax implications
or efficacy of the sample language.
Id.
Id.
This article is reprinted with the publisher’s permission from the JOURNAL OF PRACTICAL ESTATE
PLANNING, a bi-monthly journal published by CCH, a Wolters Kluwer business. Copying or
distribution without the publisher’s permission is prohibited. To subscribe to the JOURNAL OF
PRACTICAL ESTATE PLANNING or other CCH Journals please call 800-449-8114 or visit
www.CCHGroup.com. All views expressed in the articles and columns are those of the
author and not necessarily those of CCH.
JOURNAL OF PRACTICAL ESTATE PLANNING
65