I get about 5-6 calls per week from children of families who never engaged in any kind of estate planning. The son or daughter will call, grief stricken, confused, and overwhelmed to tell me that their parent just died without a living trust and they do not know what to do. In an age with such cheap options available, it always surprises me how many people die without any kind of estate planning at all.
Every family needs an estate plan. Indeed, every family has an estate plan created by the State of California called “intestate succession” and unless you act, the State will not only get to decide who gets your property, but also how and when they get it.
Moreover, many parents are still unaware that without a living trust their children will pay an average of $22,000 in fees during the probate process. A living trust is the only way to avoid this fate. Thus, engaging in proper estate planning with a qualified and experienced attorney is necessary to ensure that your passing is as uncomplicated as possible so that your children do not have to pay a ton of money and can instead focus on grieving and mourning your loss.
If proper estate planning was not already essential, it is absolutely critical if you have a child with special needs.
If you are a parent of a child with special needs, or you are a family member or friend of someone who has a child with special needs, this article is for you.
We will cover the following questions:
- What does it mean to have “special needs?”
- What immediate steps should parents take to protect their children with special needs?
- What kind of planning is needed to protect a child with special needs?
- What is a special needs trust?
- How to set up a special needs trust?
1. Does Your Loved One Have Special Needs?
In its simplicity, a person with “special needs” is a person who has a physical or developmental disability. Sounds simple right? Eh, not really. Under Federal Law a person has a “disability” if he or she is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.”[i]
Does that clear everything up? Probably not. Let’s unpack that a bit.
The phrase “substantial gainful activity” is a term of art. It is an objective standard which means that a person is unable to earn more than $1,310 per month.[ii] Additionally, this condition must last (or be expected to last) for more than a year.
Thus, under federal law, your loved one has “special needs” if:
- Your loved one is incapable for earning more than $1,310 per month; and
- He or she could not earn more than $1,310 per month for over a year or is not expected to earn $1,310 for at least a year.
The State of California adopts the federal law definition of “disabled.” So, if your loved one is “disabled” under Federal Law, he or she has “special needs” under California law as well. Additionally, under California law your loved one has special needs if he or she is “developmentally disabled,” which means: “a disability that originates before an individual attains 18 years of age, continues, or can be expected to continue, indefinitely, and constitutes a substantial disability for that individual.”[iii]
The Welfare & Institutions Code specifically states that a person is “developmentally disabled” if they have an “intellectual disability, cerebral palsy, epilepsy, or autism.”
So, your loved one has “special needs” if:
- They are incapable for earning more than $1,310 per month for one year or more; or
- They have a substantial disability that manifests before age 18, including an intellectual disability, cerebral palsy, epilepsy, or autism.
2. What Should You Do to Protect Your Child With Special Needs?
Naming a Guardian
If your child with special needs is under 18, one of the minimum protections you need to take is naming a guardian for him or her. This is extremely important. Often a child with special needs has a particular routine he or she must follow. As parents, you manage that routine so that your child with special needs can thrive to the best of his or her capability. If you were to pass suddenly, who would carry out that routine?
It is essential to give considerable thought to this question. You need to ensure that you have a long-term and short-term guardian who can manage your child’s routine and who is comfortable with your child’s condition, and who your child is comfortable being around. Often this is a family member, but sometimes it is not. At Regnum Legacy we use an objective, multi-step, non-emotional approach to naming guardians of minor children. Naming the right guardian is the first step to making sure your child with special needs is protected.
Investigating Government Benefits
The second thing you can do is see if there are government programs or benefits available to assist you and your child. As a parent you need to investigate whether your child qualifies for government benefits and programs that can supplement the care your already provide. You may think, “my child does not need that because I take care of everything” but when you pass on, who will do it? If you have failed to investigate and register your child for these programs while you are living, what will happen when you pass?
Additionally, there are some programs that can provide financial assistance to families who are caring for a child with special needs.
Obtaining a Conservatorship
If you have a child with special needs, you may need to obtain a conservatorship over him or her after they turn 18. Often it is best to do this before the child turns 18 so that on their 18th birthday you retain legal rights as their guardian/conservator. If you want to learn more about the conservatorship process, read our 9-Step Guide to Obtaining a Conservatorship.
Protect Government Benefits
To continue to qualify for government benefits your child with special needs must not own significant assets. This may seem like an impossibility but one of the most common ways a child with special needs gets kicked off a government benefit is because they receive an inheritance. So, grandparents and parents of a child with special needs face an odd choice: (1) provide for your child in your estate plan and risk the child losing critical benefits and the estate being taken by the State of California; or (2) disinheriting your child (or grandchild) with special needs.
None of these are particularly attractive options. Luckily, there is a better way – a special needs trust.
3. How Should You Plan for a Loved One with Special Needs?
To understand how to properly plan for someone with special needs you need to understand the ways people already plan for someone with special needs.
One of the more common mistakes in estate planning is giving a child with special needs a direct gift. This has two consequences. First, the person with special needs will lose valuable government benefits because they will be disqualified due to the gift. Second, the State of California may take the gift as “payment” for benefits already received by the person with special needs. Thus, this should be avoided at all costs
Another common planning tool is the disinherit the child with special needs. Although this avoids the consequences of disqualifying the person from any government benefits, it is not a good idea because it leaves the person with special needs without any kind of safety net. In essence, they will keep any of their government benefits but will be at the total mercy of the government. Government benefits are there to provide a minimum level of benefits to allow your loved one to survive, not thrive.
Additionally, this option frequently leaves parents dissatisfied because it seems cold and callous.
Leaving to Others Who “Promise” to Care for Your Child
To avoid the feeling of callousness parents feel with an outright disinheritance, they sometimes leave some of their estate to another child, family member, or friend, who “promises” to use the money to care for the child with special needs. Here are some problems with this approach:
- There is no way to enforce this type of agreement. If the person renegs on the “promise” there is nothing the person with special needs can do.
- The person you give the money to may not manage the money properly or may comingle the money with their own money and end up losing track of it.
- Your special needs child may die shortly after you (or sooner than you planned), leaving the person you gave them money to with the unintended windfall.
- The person you gave the money to may lose it in a divorce, a civil judgment, or due to their own subsequent disability.
- The person you gave the money to may use it to feed an addiction to alcohol, drugs, or gambling.
- You may end up creating fractures in the family between those who disagree with how the person uses the money for the child with special needs.
- You do not get to control what happens to the money after your child dies, and how, when, and what for the person uses the money for the child.
Setting Up an Able Account
You can set up an ABLE Bank Account for your child with special needs. The advantages of this are that you and other family members can contribute to the account. The money in that account does not disqualify your loved one from government benefits and the initial gift and the income the account earns is not taxable (your child with special needs does not pay tax on the money). There are some drawbacks:
- There is a $100,000 limit on assets owned by the ABLE Account. Meaning if you put more than $100,000 in the account your loved one will lose government benefits.
- There is an annual limit (equal to the annual federal gift limit) which is currently $15,000 per year.
So, if you are planning on leaving more than $15,000 to your child with special needs in any one year, or more than $100,000 total, then this is not a good option for you.
Setting Up a Support Trust
You may decide to set up a trust as part of your estate plan and then mandate that your trustee use the trust funds for your child’s “support and maintenance.” The problem here is that a support trust does not qualify as a “special needs trust” and IS counted as an asset of your child, which will disqualify him or her from receiving government benefits.
Setting up a Special Needs Trust
The best way to ensure your child with special needs is protected after your death is by setting up a third-party special needs trust (the third-party part means that it is set up by someone other than a person with special needs). A special needs trust is the only way to keep your child included in your estate plan AND at the same time allowing your child to receive an unlimited amount of inheritance from your estate without losing any of his or her government benefits.
Your have two options to create a special needs trust:
- You can have a stand-by special needs trust as part of your main estate plan. In other words, you create a living trust that is fully revocable, but on your death, the trust becomes irrevocable and the “stand-by special needs trust” starts to operate to care for your child. The benefit here is that you do not need any separate kind of trust for your estate plan. The downside is that if any of your other family members want to leave your child a gift in their own estate plan, they too will need a stand-by special needs trust.
- You can create a stand-alone special needs trust, which is irrevocable when you create it. The benefit here is that your you and your other family members can easily include the special needs trust in their own estate plans to leave gifts to your child with special needs. The downside to this kind of a special needs trust is that it requires you to create two separate trusts as part of your estate plan. One revocable trust to manage your estate until you die and an immediate irrevocable special needs trust that can hold gift made to your child with special needs.
So, which should you choose? If you think other family members will want to leave your child a gift in their own estate plan, then get a stand-alone special needs trust. This will make it easier to manage the asset in one single trust. On the other hand, if you expect that you will be the only one leaving your child with any inheritance, then a stand-by special needs trust may be the most cost effective way to go.
4. What is a Special Needs Trust?
A special needs trust is a special kind of trust that supplements the government benefits received by a person with special needs. It is sometimes referred to as a “supplemental needs trust.” It is designed to allow a person with special needs access to funds for things that the government does not pay for. For example:
- Your child may want to buy his or her siblings gifts for Christmas.
- Government benefits are typically insufficient to allow your child with special needs to go on trips or vacations. A special needs trust can pay for trips to the zoo, or Disneyland, or a weekend vacation to the beach.
- Maybe your child has a brother getting married and he is asked to be a groomsman. The special needs trust can purchase (or rent) a suit or tuxedo for your child. It can also give your child money to buy a wedding gift.
Basically, the special needs trust is there to supplement and add to the things your child receives from the government without disqualifying them from the benefits.
5. How to Create a Special Needs Trust
Usually with trusts there are no “magic words” you need to create a trust. Not so with a special needs trust. In order to qualify as a “special needs trust” it needs to do several things:
- It needs a provision that says that the person with special needs cannot direct the use of trust assets for his or her support and maintenance.
- It needs to say that the trust CANNOT be revoked or amended by the person with special needs.
- It needs to clarify that payments are for the benefit of the person with special needs and are not paid directly to the person with special needs.
In other words, the trust needs to have language the specifies that the person with special needs has no control over the assets of the trust. How do you do that? You select a third party to receive and manage the funds. This person is called a “trustee.”
Since the trustee will control all of the aspects of the trust, choosing a good trustee is crucial to setting up the special needs trust. Sometimes parents select the person who is named as the guardian of the child with special needs. But this may not be the best idea. First, the guardian of your child may be overwhelmed with the responsibilities of caring for your child. Adding management of these funds may not be a good idea. Second, having someone other than the guardian provides a good check and balance over the trust funds, which reduces the risk of self-dealing, fraud, and theft.
If you have a child with special needs, you need to engage in proper estate planning to ensure that the transition for your child after your death is a smooth as possible. In addition, you want to ensure that your child receives adequate care and money for the rest of his or her life. A special needs trust can do that.
At Regnum Legacy we focus our estate planning practice on families with young children. We are constantly thinking about and planning for ways parents can protect their children. If you have a child with special needs contact our office today at (951) 228-9979 or schedule a quick consultation to see if Regnum Legacy can help you protect your family.
[i] 42 USC §1382c(a)(3)
[ii] JD Supra “Social Security Administration Releases Key Figures for 2021”
[iii] California Welfare & Institutions Code §4512