The cost of health care is a concern for most people, but it pales in comparison to fees associated with caring for a child with severe disabilities. For people with cerebral palsy and bipolar disorder for example, care can easily cost several hundreds of thousands of dollars a year. Today, our health care system isn’t set up to provide for them.
“In our current system, it can be difficult or even impossible for special needs children to get health insurance,” says Nancy Spain, an attorney with Chicago-based Spain, Spain & Varnet. She specializes in special needs trusts, a means of helping parents of any asset level maintain control over money that is intended to go to a disabled child after the parents’ death.
Certainly, the health care reform bill is intended to help the disabled — with the elimination of pre-existing conditions as a reason to deny people coverage — and families may eventually opt for the flexibility of insurance rather than tying up funds in a trust. Still, Spain doesn’t expect that will happen until after the reforms have shown to be effective for persons with disabilities. In the meantime, families with disabled children should consider how a special needs trust can benefit their children in their adulthood.
Why a Special Needs Trust?
Under federal law, children are protected by the state until they are 18. Afterwards, those already benefiting from aid not only can have it removed, they could end up having to return money already spent if they come into even a small inheritance.
Furthermore, without a trust, a decedent court is left to determine how the money gets distributed to the child, adding an extra layer of complexity and a lot of expenses. “When handled properly,” says Wayne Madsen, manager of the Guardianship Group at Northern Trust, “you don’t have to get a lawyer involved every time someone needs money.”
Even wealthy parents want to be sure their child receives government benefits to cover the cost of care he or she needs throughout his or her life. A special needs trust ensures that any inherited money, no matter the source, doesn’t render a child ineligible for government assistance like Medicaid and other benefits attached to it.
First Step: Talk to Experts
By involving professionals with expertise in special needs trusts, you can eliminate the stress on surviving family members tasked with caring for the individual, as well as unnecessary court involvement and expenses. Start by meeting with an estate planning attorney with expertise in the area who can discuss with you the assets of the person in question and craft a plan that is most suitable for him or her.
Since each state is different, it can be difficult to locate and maneuver through potential sources of benefits. The ideal person should be familiar with local, state and federal entitlement, welfare and other programs that may provide the person support throughout his or her lifetime. For that reason, Spain says, “In our special needs trusts, we generally authorize the trustee to hire an advocate who is versed in government benefits.”
Covering All Your Bases
Estate planning is a complex process that few people understand, and mistakes in special needs trusts are especially common, making it all the more important that you choose carefully who will oversee the process for your family. “Families who are equipped with the proper documents have much better lives than ones who are handcuffed by insufficient planning,” Madsen says.
Taking certain steps can ensure that the money parents or grandparents leave a child will be spent as they intended it:
1. Draft a legal will. First, your will must reference the existence of the trust. If you die without a will, the state could end up determining how your assets are distributed.
2. Name a trustee. Particularly if the child stands to inherit a significant amount of money, you’ll want a corporate trustee to oversee the financial side of the plan. “A trustee may be in agreement with a close sibling, we may even know case managers who can help, but if we don’t have authority in a document or there is no document, our hands are tied,” Madsen says.
3. Consider naming an advisor. Sometimes a family member acts as an advisor on behalf of the child. Their work often goes beyond a financial role, from reviewing documents to researching special needs programs to networking with other special needs families. Just make sure whomever you name is comfortable with the role. If they’re not prepared for the commitment, consider asking somebody else instead.
4. Determine all possible sources of income. Make sure that any money from unexpected sources isn’t designated to go directly to the child. Do you have life insurance? Who’s the beneficiary? There needs to be recognition of the trust in all potential avenues of income. If an adult child receives money from an IRA or a well-meaning relative, the state could remove any aid the child is currently receiving.
Other Considerations
Language regarding distributions and guidance is of the utmost importance. “There are some very specific things that need to go into the trust to keep it an exempt asset,” Spain says. In some cases, the trust can’t pay for food and shelter. Common expressions in ordinary trusts, like “support” and “best interest,” can remove a person’s eligibility. That’s why it’s crucial to involve an expert who can ensure your child’s eligibility for assistance down the road.
If you have a special needs child who has already inherited a large sum of money, consider creating an OBRA trust as a backup plan. An OBRA is a kind of special needs trust for cases where there’s an inheritance of money already in the child’s name. It provides that at the end of the child’s life, whatever is left in the trust gets paid to the state. This provision will enable the child to continue using the money as you see fit during his or her lifetime, which may still be a better option than a state-controlled estate.
It’s natural to put off planning for something that may not happen for years to come. Yet while difficult to contemplate, planning for the death of a guardian is even more important with disabled children who won’t be able to handle the estate themselves. By taking the proper precautions, you can provide for your child, give your family more control over their inheritance, and offer peace of mind to those caring for the child long into the future.
