In recent years, as more developmentally disabled individuals have been deinstitutionalized and become active residents in local communities, estate planning for parents of these individuals has received greater focus. This article will review issues to be addressed when advising clients about planning for the devolution of their assets when they have one or more beneficiaries deemed to have a permanent disability, and will focus on special needs trusts. A special needs trust may also be used for estate planning between spouses, but that aspect is beyond the scope of this article. Moreover, references to state law will be limited to statutes promulgated in New York, the state in which I primarily practice, advising high-net-worth individuals and owners of closely held businesses on tax, estate, and business matters.
So whom are we discussing? Section 7-1.12 (a) (4) of the New York State Estate Powers and Trust Law (“EPTL”) defines a disabled person as one “….(i) with mental illness, developmental disability or other physical or mental impairment; (ii) whose disability is expected, or does, give rise to a long-term need for specialized health, mental health, developmental disabilities, social or other related services; and (iii) who may need to rely on government benefits or assistance.”
After overcoming the shock, disappointment, and, often, attempt to lay blame for having a developmentally disabled child, there are immediate issues that parents try to address. However, considering the major strides made over the past 30 years in diagnosing and treating developmental disabilities, the answers to those questions are never definitive but must be reassessed every three to five years. By the same token, the corresponding estate plan must also be revisited. One of the first questions to answer is determining the child’s mental capacity–his ability to make decisions concerning his life and whether he can function on his own in society. As an example, can a mentally retarded individual maintain a job, collect a salary, and manage his expenses? Based on the conclusions of the mental health professionals engaged by the family, the parents may determine that if the child was to be the beneficiary of a sizable sum of money, he may not have the capacity to properly manage it.
Another consideration to be addressed is whether the disability can be measured definitively or is subject to variations. If definitive, with proper treatment and supervision the person might be able to maintain a stable level of existence. For example, someone suffering from a mental illness may become stabilized if properly supervised and treated on a regular schedule. The degree to which recurrence of the disease is determined to have lessened will affect the recommendations offered by the professionals involved in the parents’ estate planning.
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Lastly, the parents must consider if the child, despite the disability, can care for himself. This goes beyond the foregoing issues, for it concerns whether the person can live independently rather than in a group home. The impairment and its impact on the individual’s independence must be considered when drawing up an estate plan.
A Unique Situation
Parents of a disabled child face a dilemma unknown to other parents since the child is eligible to receive public assistance, such as Supplemental Social Security Income (SSI), because of the disability. The estate planner must be aware that there should not be a direct distribution of the parents’ assets to the child in order to avoid losing the SSI benefits. The planner should be aware of the planning device known as a special needs trust, or SNT, which provides benefits to the beneficiary, that is, the disabled individual, beyond those covered by federal and state benefits. This is a quality of life issue, since the SNT should supplement–not supplant–the government benefits received.
Before considering the SNT and its general characteristics, we should review the other alternatives of direct and indirect bequeathing of assets and why an SNT is preferable to those methods. First, the parents can disinherit the disabled child. While this action retains the ability to receive government benefits, it generally does not sit well with the parents who realize that nothing has been designated to improve the child’s quality of life beyond what is received from government programs. Second, parents may choose to leave money outright to the disabled child, but federal and state governments will use this amount to offset services formerly covered by SSI and/or Medicaid. Only after the inheritance has been fully exhausted will the government benefits resume. Last, a method used by some parents is to leave funds to a sibling or another third party with instructions that the money be used for the disabled child. The parents hope this action will place a moral obligation on the third party to oversee the disabled child. However, the assets are not segregated and can be available for use by this third party or may be accessed by this individual’s creditors in the event of a divorce or personal bankruptcy.