Magazine article The CPA Journal

Using Special Needs Trusts

Magazine article The CPA Journal

Using Special Needs Trusts

Article excerpt

Comfort for Parents, Dignity for Disabled Children

As more developmentally disabled individuals have been deinstitutionalized and become active residents in their communities, estate planning for parents of these individuals has received greater focus. A special needs trust may be an effective planning tool for the devolution of parents' assets when they have one or more beneficiaries deemed to have a permanent disability. Although beyond the scope of this article, such a trust may also be used for estate planning between spouses.

New York Law

Section 7-1.12 (a)(4) of the New York State Estate Powers and Trust Law (EPTL) defines a disabled person as someone-

(i) with mental illness, developmental disability or other physical or mental impairment; (ii) whose disability is expected, or does, give rise to a longterm 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.

Parents of disabled children have to deal with strong, complicated emotions, and also with other issues, both short- and long-term, that must be reassessed every three to five years. They must also revisit the corresponding estate plan. One of the first questions to answer involves determining the child's mental capacity-his ability to make decisions concerning his life and whether he can function on his own in society. For 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 a child is to be the beneficiary of a sizable sum of money, he may not have the capacity to properly manage it.

Another consideration is whether the disability can be measured definitively or is subject to variations. If it is definitive, then 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. The degree to which recurrence of the disease has lessened will affect the recommendations offered by the professionals involved in the parents' estate planning.

Finally, the parents must consider if their child, despite the disability, can care for herself. This goes beyond the foregoing issues, because 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 developing an estate plan.

Unique Situation

Parents of a disabled child face a unique dilemma because their child is eligible to receive public assistance, such as Supplemental Social security Income (SSI). An estate planner must be aware that, in order to avoid losing SSI benefits, there should be no direct distribution of the parents' assets to the child. The planner should be aware of the planning device known as a special needs trust (SNT), which provides benefits to the beneficiary (i.e., the disabled individual) that go beyond those covered by federal and state benefits. This is a quality-of-life issue, because the SNT should supplement, not supplant, the government benefits received.

A review of the other alternatives for the direct and indirect bequeathing of assets will reveal why an SNT is preferable. First, parents can disinherit the disabled child. While this action would ensure the child retains the ability to receive government benefits, parents who realize that nothing has been designated to improve their child's quality of life beyond such government subsidies generally avoid it. second, parents can choose to leave money outright to the disabled child. Federal and state governments will use this amount, however, to offset services that would have been covered by SSI or Medicaid. Only after the inheritance is exhausted will government benefits resume. …

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