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Planning For Those With Special Needs

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Buying investment properties for clients or deciding whether they can go vacationing with a friend in Florida is not normally considered part of the job description of the financial advisor. But for John Nadworny, a certified financial planner and principal of Bay Financial Associates, Waltham, Mass., it’s all in a day’s pay.

The reason: Nadworny serves as a trustee of special needs trusts, a responsibility that requires him to make financial decisions–and, as necessary, consult with attorneys–about when and how much money to distribute from a trust to its beneficiaries: individuals who depend on the trust funds to meet expenses not covered by Social Security Income and Medicaid programs.

“It’s a huge fiduciary duty,” says Nadworny, “You have to account for every dollar and ensure that [trust beneficiaries] are spending the money prudently. But the work has also been fun.”

The enjoyment derived from fulfilling the financial needs of a disabled person–a client’s son who has severe autism, a spouse with Down syndrome or a daughter suffering from emphysema–might also be viewed as the fruits of a sometimes lengthy process engendered by special needs planning. The starting point is an in-depth assessment of the disabled individual’s near- and long-term financial needs. Also required are “yardsticks” (or benchmarks) with which to measure decisions about special needs; and the establishment of a successor support team.

This includes a guardian to care for the individual in the event of the trust grantor’s death or disability; an executor of the grantor’s will; a trustee to oversee the special needs trust (preferably a corporate trustee who can be expected to act with impartiality); and an advocate who serves in an informal capacity on behalf of the disabled individual.

“The successor team you pick will have to carry the plan forward, so it should include the best people you can find,” says Steve Rhatigan, a certified estate planner and principal of Stemark Associates, Houston. “When ill-prepared successors are named, bad things can result, like having a guardian give up on the job because he or she really didn’t understand that diapers would have to be changed for a 21-year-old.”

Topping the issues to be addressed in most special needs cases, sources say, is how and where a disabled child is to live upon reaching adulthood. Depending on the child’s disabling condition–Down syndrome, autism and cerebral palsy are among the most common–parents will need to choose from several housing options.

These include remaining in the home of the parents, another family member or guardian; or moving into a private or state-supported group home. The choice will depend on the extent of disability (and, hence, the level of care required); resources available in the new home to provide needed services; and, not least, money to fund the preferred option.

The cost can be steep. Rhatigan cites rates as high as $3,700 per month, or $44,000-plus per year, for a top-tier community home, though assisted-living housing offering basic services can be had for about $1,200 per month, he says.

Means-tested public assistance programs, including Social Security and Medicaid, are available for qualifying individuals to cover housing and other essentials like food, clothing and health care. The challenge, observers say, is how to maintain eligibility for these programs while funding additional expenses not covered by public benefits, such as trips to family members, reading materials, educational tools and over-the-counter medicines.

Special needs persons who have more than $2,000 in “countable resources” are ineligible for public assistance; they first must draw down personal assets below this threshold–potentially leaving them in poverty or unable to fund supplementary expenses–before they can qualify, advisors say.

The public benefits restrictions are not, of course, a problem for disabled people who have sufficient assets to do without the government programs–a figure that Rhatigan pegs at $1 million or more. Below this benchmark, he says, clients will need to look to outside assistance.

Enter the special (or supplementary) needs trust, which enables clients to bequeath property to a disabled person to fund additional expenses without jeopardizing government benefits. The trust can also coordinate with the trust grantor’s estate plan so the beneficiary will be provided for if the grantor becomes disabled or dies. The vehicle can additionally protect assets from the beneficiary’s creditors.

Accomplishing these objectives, however, requires a proper structuring of the trust, starting with the appropriate type. Too often, advisors say, attorneys select a boiler-plate from a manual that contains language for a first-party or self-settled trust, one created using the grantor’s own money, rather than a third-party trust funded with assets from parents, grandparents, a spouse or relative.

When a first-party trust is used, the state must be reimbursed upon the death of the trust beneficiary for any expenses paid by public assistance monies, says Nadworny. Reimbursement is also required in cases involving a state-created trust resulting from a settlement, such as a personal injury award. When the settlement is substantial, public assistance money may also be beyond reach.

“The only time I balked [in applying for government assistance for a client] was when there was a $10 million settlement in personal injury case,” says Jim Swiderski, president of the Law Offices of James Swiderski, La Jolla, Calif. “This amount of money was so large that we deemed it impractical to try to convince a court that the individual would need public benefits.”

Often, however, the problem is not securing government benefits, but funding the special needs trust. Ron Pearson, a principal of Beach Financial Advisory Service and director of the Financial Planning Association of Hampton Roads, Virginia Beach, Va., says planners and attorneys “routinely” fail to check beneficiary designations of estate planning documents. If the special needs trust is not named a beneficiary of, for example, the grantor’s pension plan, then the trust will not receive the proceeds–even if other estate planning documents specify otherwise.

“Any document with a beneficiary designation will always trump a revocable living trust or will,” says Pearson. “One of my clients set aside $2.25 million for a severely disabled child she had adopted. But when we checked out the beneficiaries of her IRA and life insurance policy, not one nickel named the special needs trust. This is really critical.”

Pearson emphasizes that the trust–not the disabled individual–must be named as the beneficiary if the special needs person is to maintain public assistance. So if 3 children, one of whom is disabled, stand to inherit in equal portions their parents’ estate, then one-third will go to child ‘A’, one-third to child ‘B’ and one-third to the special needs trust.

Pearson cites other common mistakes. Among them: naming a sibling as the trustee or successor trustee, which could engender a conflict of interest, and using inappropriately written Crummey clauses in irrevocable special needs trusts that grantors create while they are alive. Pearson estimates some 40% of such inter vivos (or living) trusts are rendered invalid as a result.

These clauses, which the IRS requires so that contributions to the trust can qualify for the annual gift tax exclusion, will disqualify a disabled child beneficiary for public assistance if they stipulate the beneficiary has 30 days from the date of the contribution to withdraw money from the trust. The solution to the problem, says Pearson, is to stipulate in the Crummey clause that a remainder beneficiary, such as a brother or sister, has the option to withdraw during the 30-day window.

How should the trust be funded? Most advisors interviewed by National Underwriter say life insurance should serve as the primary vehicle, in part because of the tax advantages. Advisors add that life insurance is especially well-suited for families who don’t have enough money saved in retirement assets to guarantee a target benefit for a child beneficiary.

For 2-parent households, Nadworny recommends the non-working spouse be named as a policy beneficiary and the special needs trust as a contingent beneficiary. If 2 separate policies (1 for each spouse) are desired but deemed prohibitively expensive, the parents might opt for a more affordable joint-and-survivor (or second-to-die) policy, where the death benefit is paid to the special needs trust upon the death of the second spouse. But advisors caution the policy’s lower cost has to be weighed against the added risk.

“If the surviving spouse will need insurance to help maintain the household and care for special needs child, then a second-to-die policy is of little value,” says Craig Marcott, a financial planner and director of the Financial Planning Association of Long Island, East Patchogue, N.Y. “What I often recommend for families with limited finances is term insurance to cover short-term, cost-of-living needs and a smaller permanent policy to fund the trust.”

Pearson, however, generally argues against purchasing insurance–permanent or term–claiming it is too expensive for most of his middle income clientele. He recommends instead carving out a portion of retirement plan assets for the special needs trust.

“Life insurance would be an easy sale if I wanted to push it,” he says. “But from a financial planning perspective, it has not made sense in most cases.”

What’s not always easy to push is the trust itself, often because parents are in denial about the care their disabled children will require as adults. Rhatigan cites a father who resisted establishing a special needs trust for a daughter suffering from autism and bipolar disorder; and who insisted that she ultimately could lead an independent life, despite the fact she was almost totally nonverbal and had difficulty making eye contact with others.

“I reviewed our care plan and, using the analogy of a construction project, asked the father whether he wouldn’t prefer to have greater rather than less structural support for the building,” says Rhatigan. “As an engineer, he appreciated the point. And I think we’re now halfway to closing the case.”


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