Estate Planning Considerations for Individuals with Special Needs
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.
C. Selecting a Trustee
As for who should be appointed trustee of the Special Needs Trust, there are several possibilities, with the appropriate choice depending upon the particular family’s situation:
- a trusted family member or friend
- a bank or other corporate trustee
- a committee of individuals
- a pooled account trust administrator
For a brief but helpful outline of the planning considerations to be taken into account when drafting a Special Needs Trust, see this Martindale-Hubbell article.
Tax Benefits for Families with Special Needs Children
Thomas J. Brinker, a CPA and professor of accounting at Arcadia University in Pennsylvania, recently prepared an income tax benefit checklist for Steve Leimberg’s Estate Planning Newsletter, outlining the numerous potential tax benefits for families caring for special needs children. Some of the more notable benefits include:
- Deductions for expenses associated with sending a special needs child to a school or institution with a special curriculum for mentally disabled individuals. Deductible expenses include: lodging, meals, transportation, incidental education costs provided by the institution, costs of supervision, care, treatment, and training.
- Deductions for expenses associated with tutoring by a specially trained teacher, such as for therapeutic and behavioral support services.
- Deductions for medical conferences and seminars, including both transportation and conference fees.
- Deductions for medical travel and transportation.
- Deductions for unreimbursed medical expenses, to the extent the taxpayer itemizes the deductions and expenses exceed 7.5% of the taxpayer’s AGI.
Last Point of Consideration
In preparing for the possibility that a caretaker predeceases a special needs individual, drafting a letter of intent to accompany the estate plan is highly recommended. The letter should be delivered to the trustee upon the caretaker’s death and should summarize the individual’s needs: medical and otherwise. It can include information such as the individual’s medical history, required medications, medical service providers, social contacts, skills and hobbies.
This is a very useful article for anyone interested in estate planing for their family! Thanks