Estate planning and lifetime planning for parents with a child with a disability present special challenges. The goals of the parents are to utilize their assets in such away to enrich their child’s life while, at the same time, preserving the child’s public benefits.
Estate Planning Options
Parents of a child with a disability have four options with respect to estate planning:
- Disinherit the child;
- Distribute the assets directly to the child;
- Distribute the assets to a sibling with the understanding that the siblings will use the assets for the benefit of the child with a disability; or
- Distribute the assets to a trust for the benefit of the child with a disability.
Disinherit the Child
The first estate planning option is to simply disinherit the child. If the parent’s estate is relatively modest, and the child’s needs are great, this may be the best approach, because any legacy from the parents would be inadequate to meet the significant needs of the child.
Distribute the Assets Directly to the Child with a Disability
The second option is to make the gift to the child with a disability. The problem with this option is that distributing the assets to the child with a disability will disqualify the child for any means tested public benefits. This may render the child ineligible for supplemental security income (SSI), Medicaid, or federally-assisted housing, as well as for supported employment and vocational rehabilitation services, group housing and the like. In addition, the child may be charged for program benefits previously received.
Distribution to a Sibling or Related Party
The third option is to distribute the assets to a sibling or related person with the understanding that the sibling will use the monies for the benefit of the child with a disability. Distribution to other children is a risky proposition. If assets are distributed to a sibling, the assets are held in the name of the sibling. The assets are then exposed to the creditors of the sibling. The assets may also be claimed in a divorce action and be subject to misappropriation or mismanagement. Also, if the sibling spends more than $10,000 per year of the inheritance on the child with a disability, a taxable gift may result. Any income earned by the assets will be taxed to the sibling.
Supplemental Needs Trust Created for the Benefit of a Child with a Disability
A trust is created by a third party for the benefit of a disabled child and not using the disabled child’s property, is typically referred to as a Supplemental or Special Needs Trust. A Supplemental Needs Trust established for a disabled child does not require a pay-back provision as mandated by the disability trust provisions of 42 U.S.C. § 1396p(d)(4)(A), and C.S.R 15-14-412.8.
Third party trusts are trusts which are established with assets that are contributed by individuals other than the disabled child for the benefit of the child. The terms of the trust will determine whether the trust fund is countable as a resource or income for Medicaid eligibility. A Trust that authorizes the trustee to use principal or income for the support of the beneficiary will probably require the trust assets to be considered as an available resource and disqualify the beneficiary from receiving public benefits. This would be true even if the trustee had complete discretion to make distributions of principal and/or income.
A trust that limits distributions to or for the benefit of the disabled child for non-support or supplemental needs will not be considered as a countable resource. Although the trust is still a discretionary trust, the trustee is limited to making use of the trust funds for non-support purposes.
Learn more by browsing Mr. Frigon’s other special needs trusts articles.
This information is provided as a public service and is not intended as legal advice. Such advice should be obtained from a qualified Elder Law attorney. To find one in your area, visit www.NAELA.org and click on “Find An Attorney.”
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