Inheritance for a Disabled Child
Inheritance Planning for a Child with Disabilities
If your child or other loved one is not able to support him/herself due to developmental disabilities, autism, intellectual disabilities, cerebral palsy, traumatic brain injury, mental health issues or other disabilities, he/she probably could qualify for various public programs that assist with health care, housing, and living costs. However, you probably will disqualify your child if your death leads to outright receipts under your will, accounts, life insurance, or 401(k) plan or because you don’t have a will. With special needs planning, you can supplement your child’s government benefits, but otherwise your generosity may end up hurting your child instead of helping him/her.
That is because many people with developmental disabilities and other serious impairments rely on means-tested public benefits, such as Medicaid, Supplemental Security Insurance (SSI), and New Jersey Department of Human Services Division of Developmental Disabilities (DDD) housing placement. To make matters worse, in addition to disqualifying a child who inherits funds, some programs may require prior benefits to be repaid almost as if you left money to the government instead of your child.
Fortunately, you can supplement rather than supplant your child’s disability benefits by funding a special needs trust (SNT) instead of leaving amounts to your child outright. Because a trustee rather than your child has final say over spending an SNT, it doesn’t count as owned by the child when testing eligibility for public programs. Thus, the special needs trust can pay for things that help your child such as healthcare, education, transportation, activities, and vacations while government program meet your child’s other needs.
Preparing an SNT alone won’t protect your child with serious disabilities. Rather the SNT must be coordinated with a will, beneficiary designations for life insurance IRAs, 401(k)’s and other accounts, and title to real estate and other assets may need changes.
We draft special needs trusts first and foremost to meet your goals. Typically, this will call for an SNT that doesn’t disqualify your child for disability programs but gives the trustee enough flexibility to meet your child’s needs. Thus, a trustee must have authority to spend the trust in ways that substantially benefit your child even if your child’s benefits could be reduced. Unfortunately, too many planners tie a trustee’s hands with unnecessary limitations to preserve public benefit eligibility at all cost.
We bring to bear an in-depth knowledge of trust and benefit laws gained through more than 25 years of special needs planning. Thus, we know how to give an SNT trustee broad discretion without disqualifying the beneficiary for key public programs. For instance, when drafting, we understand that a third-party SNT (common in estate and gift planning) doesn’t have to be irrevocable or provide for the Medicaid payback, notice, and record keeping that are essential in a first-party SNT (typically funded through a lawsuit and some less common sources).
We also work hard to create the right trust for your family. We listen to your goals, and tailor the trust to accomplish your objectives. For example, some attorneys use generic form trusts that can prevent the trustee from paying for the beneficiary’s housing, even though he/she may have mild disabilities and could thrive in independent living. We would take a different approach and give the trustee more latitude to pay for housing and meet the beneficiary’s needs.
Special Needs Trust vs. ABLE Account
ABLE account legislation was enacted at the end of 2014. It allow a person who became disabled before age 26 to create a special ABLE account that isn’t SSI and Medicaid disqualifying and enjoys tax benefits. However, ABLE Accounts may only be used to pay for “qualified disability expenses” such as education and transportation and are subject to Medicaid payback.
ABLE accounts can be useful but shouldn’t replace special needs trusts. First, an ABLE account can’t hold more than $100,000 without affecting Medicaid and SSI eligibility. ABLE accounts also can’t receive more than the federal gift tax annual exclusion ($14,000 in 2015). Since an inheritance is usually a lump sum, an ABLE account can’t accept a sizable inheritance.
ABLE accounts also involve a trap for the unwary. Anything remaining in an ABLE account when the disabled owner dies must repay Medicaid. By contrast, a special needs trust that doesn’t contain the disabled person’s funds need not repay Medicaid, and the remainder can be left to other family members. Thus, a special needs trust may be far more cost effective than an ABLE account if it isn’t fully spent during your child’s lifetime.