Florida Estate Planning Lawyer & Attorney : Stokes McMillan Maracini & Antúnez : Litigation, Probate, Trust Administration

In Estate of Hicks, the Tax Court permitted the estate of a special needs child to deduct a loan made by the child’s parent to a non-special needs trust established for the benefit of the child as part of a transaction intended to preserve the child’s future Medicaid eligibility. Here is how the case unfolded:

The child, Kimberly Hicks, along with her mother and sister, was involved in a horrific car accident when a train collided with the family’s car.   Kimberly, who was only three years old at the time of the accident, sustained severe injuries that left her a quadriplegic, dependent on a respirator to breathe. A lawsuit brought by Kimberly’s parents against the train company resulted in a settlement for the family in the amount of $4,650,000. Pursuant to the proposed settlement plan, Kimberly was allocated $1,450,000 for her injuries, while her parents were allocated $1,415,000 for loss of consortium and services. The remainder went to attorneys’ fees and expenses. 

Under Ohio law, where the Hicks personal injury case was filed, the probate court’s approval of the settlement plan was required. In addition to approving the proposed allocation of the settlement proceeds, the probate court also approved the following aspects of the plan:

1.      The creation of the Kimberly Hicks Special Needs Trust. This trust was to be funded with $1,000,000 of Kimberly's settlement proceeds, and was designed to comply with Medicaid eligibility rules. Because of this, the assets of the trust would not need to be “spent down” to meet Medicaid eligibility requirements, but upon Kimberly’s death, the assets remaining in the trust would be required to be used to pay back the state for any medical expenses paid on Kimberly’s behalf. 

2.      The creation of the Kimberly Hicks Settlement Fund Management Trust. This trust was to be funded with $450,000 of Kimberly's settlement proceeds. The trust’s assets would be included in determining Kimberly’s eligibility for Medicaid.  However, in what I think was a brilliant move, the attorney for the Hicks family proposed that in addition to $450,000 of Kimberly’s proceeds being placed in the trust, that Kimberly’s father loan the trust $1,000,000 of the settlement proceeds which were allocated to him. The loan was to be evidenced by a promissory note that required payment of interest, but not principal, and would be callable by Kimberly’s father on the occurrence of one of two events: Kimberly’s death, or, her inability to obtain medical insurance at a reasonable premium once she reached 18 years of age.

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As the population growth rate (both in North America and world-wide) continues to rise, so to does the number of individuals diagnosed every year with mental and/or physical disabilities. This makes it increasingly likely that, at some point in your estate planning practice, you will encounter a family in need of an estate plan addressing, and providing for, a family member with special needs. There are a multitude of tools available to these families which, when utilized, can serve not only to provide for the long-term care of the individual after the death of his or her caretaker, but also to provide tax benefits for expenses incurred in connection with the care of the special needs individual.

Special Needs Trusts

A. Purpose

Special Needs Trusts (also called “Supplemental Needs Trusts”) enable the caretaker of an individual with special needs to provide for the individual long after the caretaker’s death. The typical plan provides for a testamentary trust whereby, upon the death of the caretaker, a trustee is appointed to hold the assets of the trust for the benefit of the special needs individual, paying special attention not to make available to the beneficiary any assets which could be deemed to disqualify the beneficiary from being eligible to receive certain benefits under governmental programs such as Social Security and Medicaid.

B.  Critical Provisions

The terms of the Special Needs Trust should provide the trustee with discretion to make distributions from income or principal that are deemed necessary or advisable for the satisfaction of the beneficiary’s “special non-support needs.” Special non-support needs should be specifically defined as those necessary to sustain the beneficiary’s good health, safety, and welfare when, in the discretion of the trustee, those requisites are not being provided by any public agency, office, or department, or are not otherwise being provided by other sources of income available to the beneficiary. It is advisable to include a non-exclusive list of what special non-support needs may consist of, such as: sophisticated medical or dental or diagnostic work or treatment for which funds are otherwise unavailable, including plastic surgery or other non-necessary medical procedures; private rehabilitative training; dental care; and recreation and transportation. It is imperative, however, to specify that payment for such special non-support needs can only supplement governmental or private assistance or benefits programs and cannot replace them. This is key to ensuring the assets of the Special Needs Trust never serve to disqualify the beneficiary’s eligibility for the governmental assistance he or she may be receiving.

Other crucial language in a Special Needs Trust includes empowering the trustee to take whatever administrative or judicial steps may be necessary to continue the public assistance program eligibility of the beneficiary (including terminating the trust), as well as specifying that the beneficiary may not appoint or assign the trust’s assets away, and that the assets are not available to the beneficiary except in the trustee’s discretion.

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