Estate Planning for Parents of Disabled
Children
by Mark W. Worthington, Counsellor
at Law
Introduction
Parents of a disabled child not only need to do their own life and estate
planning-they are in the unique position of needing to plan for the entire
life of their child, including adulthood.
Such parents need comprehensive estate planning. The plan should provide
for the child not only on the death of the parents, but if they both become
sick or incapacitated.
All too often, "planning" for such parents and children never
goes beyond, "Well, I'm sure Aunt Bessie will look after Fred if
something
happens to us. She's responsible." Even then, often neither Bessie
nor Fred are consulted as to what they want.
Everyone Needs an Estate Plan
Of course, like everyone, these parents should do what most of us fail
to do: estate planning! Everyone should have a Health Care Proxy naming persons
to make medical decisions for them if they cannot. Everyone should have an
effective Durable Power of Attorney, along with the necessary instructions
to make sure it is effective, naming others to handle financial and personal
business matters if they cannot. Everyone needs a will, especially to name
guardians for minor or disabled children if they die.
Many more people than have them should have trusts of one form or
another,
most typically a Revocable Living Trust. This is not only a more reliable
method than a Durable Power of Attorney of managing finances and personal
business if the parents become incapacitated, but can be used to reduce
estate taxes for married couples, as well as provide for trusts for children
to continue after the death of the creator of the trust.
Additional Planning for Parents with Disabled Children
Parents of disabled children need to go beyond this. Exactly what or how
far, of course, depends upon the nature and severity of the disability, the
parents' resources, and family goals and objectives.
Although the parents can name someone to act for them if they become
incapacitated, they cannot name someone to act on behalf of an incapacitated
adult child without court involvement. A trust can minimize court
involvement
by removing asset management and distribution decisions from the control
of the guardian and the court. In lawyer lingo, there need not necessarily
be a guardian of the property for a disabled child after the parents die.
Documents should be in place indicating the parents' choice of guardian
of the person, however, both at the parents' death, and in case of their
disability.
Parents must assess the future non-financial needs of the child should
they die. With whom or where will the child live? What housing options
or assistance are available? What activities does the child enjoy?
Next, parents need to estimate the future financial needs of the child,
taking into account projected government assistance.
Next, the parents must create, perhaps with the assistance of a
professional
financial advisor, a financial plan for their future as well as the child's.
How will the parents create enough wealth, or preserve enough wealth, to
reach the goals they have for themselves and their child? Should they leave
a larger share for the disabled child than for the other children?
Protecting the Financial Estate During the Lives of the Parents
Next, the parents must consider what should be done to protect their estate
from devastation during their lives. Are the parents in high-risk occupations
or activities (neurosurgeon, landlord) which may indicate a need for additional
insurance or asset-protection planning? Do they have enough medical, disability,
and life insurance? Nursing home costs pose a threat to every estate. Most
except the very wealthy should strongly consider Long-Term Care Insurance,
which will seem expensive until the day one of the parents needs a nursing
home (typically $60,000 to $70,000 per year in Massachusetts). And of course,
there are estate taxes on everything the parents own at death over $625,000,
at rates from 37% to 55%. Many are caught off guard, as the taxable estate
includes such overlooked items as the value of IRAs, life insurance death
proceeds, and even collectibles in the house.
Protecting the Estate for the Child after the Parents' Death
As part of their overall estate planning, parents can have a portion (or
all) of their estate stay in a trust for the benefit of their disabled child
after they die. This can have several benefits. First, if done as part of
a revocable living trust, the assets bypass probate. Second, the assets will
be managed by someone the parents choose, not by the guardian the court chooses,
or by the child. Third, the parents can control what happens to the money
when the child dies. Fourth, the parents can include guidance or legally binding
directives about how the money is to be used for the child.
Fifth, and sometimes of most importance, the trust can be drafted so
as to not disqualify the child from government assistance. This is called
a Special Needs Trust. Since most government assistance requires the
recipient
to have very low income, very low assets, or both, an outright bequest
to the child, or a trust which gives the child too much right to demand
money, will disqualify the child from government assistance until the child
spends down the trust. Although the government is fairly hostile towards
people planning with their own assets in order to qualify themselve for
government assistance (e.g., Medicaid coverage for nursing homes), the
government has shown no interest in erecting blockades against parents
planning with their own money for disabled children.
Even small amounts in a Special Needs Trust can make a huge difference
in the life of a disabled child. For example, while the child's basic needs
could be met with government assistance, the trust could be used to provide
"extras" like a television, a trip to visit the relatives in
California (or tickets for relatives to visit the child), a special van,
or a computer with voice-recognition technology.
Protecting the Child's Own Money
As a final note, sometimes disabled children have their own funds which
need protecting. The funds may have come from a lawsuit over the actions or
negligence which resulted in the child's disability. If the lawsuit judgment
is paid to the child or a guardian, the money will be considered fully available
and again disqualify the child from government assistance.
In part because of this, often damages are negotiated to be paid as
a structured settlement, paid over the life of the child. One downside
to this is inflexibility: if a child needs more in one year than the
settlement
calls for, the child must wait for next year's funds. Another is that
receipt
of funds each year may cause a reduction in, or disqualification from,
government assistance, depending upon the circumstances.
However, it is possible for a Special Needs Trust to be created with
the child's own funds (such as the settlement), yet not have the trust
disqualify the child from government assistance. If the child is under
age 65 when the trust is created and the child is disabled under social
security regulations, such a trust can be created. The only requirement
is that the government be reimbursed from the trust for medical expenses
paid from the Medicaid program at the death of the child.
Recommended Reading
An excellent resource for parents is a book called "Planning for
the Future: Providing a Meaningful Life for a Child With a Disability After
Your Death" by L. Mark Russell, American Publishing Company (ISBN: 0963578006).
|
