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Estate Planning for Individuals with Special Needs

June 4, 2024 - By: Richard P. Breed, III

Creating an estate plan that includes provisions for a loved one with special needs is an essential task to ensure that they are well taken care of after you're gone. A proper plan can provide for their financial needs without jeopardizing their eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI). Here's an overview of what estate planning for individuals with special needs might involve.

Understanding Special Needs Trusts

A special needs trust is designed to manage resources for a person with special needs without affecting their eligibility for available public assistance benefits. There are three main types of special needs trusts:
  1. First-Party Special Needs Trusts: These are funded with the individual's own assets, perhaps from an inheritance or a legal settlement. This type of trust allows the beneficiary to remain eligible for public assistance benefits, but after their death, any remaining assets in the trust are used to repay the government for the cost of their care.
  2. Third-Party Special Needs Trusts: These are funded with assets from someone other than the beneficiary, like their parents or other family members. This type of trust does not have a payback or reimbursement provision to the state after the beneficiary’s death.
  3. Pooled Trusts: Managed by nonprofit organizations, these combine the assets of many beneficiaries, and each person has a separate account for their needs. These also generally include a payback provision.
Is a Guardianship Needed?

Guardianship is a legal relationship where a court gives a person (the guardian) the power to make personal decisions for another (the ward) where the ward lacks the capacity to make those decisions themselves. A guardian has the authority to make decisions about the ward’s personal affairs, medical treatment, and living situation.

When planning for a special needs individual, consider whether a full guardianship is necessary or if limited guardianship will suffice. It's crucial to balance the individual's desire for independence with the need for support.

The Importance of a Letter of Intent

A letter of intent can be a crucial document in planning for the care of a person with special needs. While not legally binding, the letter can serve as a guide for others, such as guardians or trustees, about the person's care preferences, routines, medical needs, and other important aspects of their life. The letter can also identify an advocate or the team involved in helping to provide for the person’s day-to-day care.

Coordinating with Government Benefits

Special needs planning must consider the impact of an inheritance or gift on the individual's eligibility for government benefits. SSI and Medicaid have asset/icome limits and receiving an inheritance can disqualify an individual from these programs. Proper planning ensures that the individual continues to maintain eligibility for assistance, while also benefiting from the inheritance.

The Process of Establishing a Special Needs Trust
  • Choose a Trustee: Select a trustee who is knowledgeable about special needs issues and financial management. This does not necessarily have to be a family member.
  • Prepare the Trust Document: Work with an attorney to create a trust that complies with federal and state laws.
  • Fund the Trust: Determine what assets will fund the trust and whether they are to transferred during your lifetime or at your death.
  • Maintain the Trust: The trustee must manage the trust's assets, file income tax returns for the trust, make distributions for the beneficiary's needs, and keep detailed records.
Legal & Tax Considerations

When setting up a special needs trust, it's essential to comply with federal and state laws. An attorney with experience in special needs planning can help navigate the complex legal landscape. Special needs trusts also have specific tax rules. Trust income can be taxed at either the trust's tax rate or the beneficiary's tax rate, depending on the trust's structure and distributions.

Estate planning for individuals with special needs is a complex but essential process to ensure that your loved one is provided for after you're no longer able to do so. Involving a legal professional who understands the nuances of special needs planning is crucial to developing an effective estate plan. As is the case with all of your estate planning, regular reviews and updates of the plan are also necessary as laws and personal circumstances likely will change.