Parents with disabled children face special estate planning challenges. The cost of supporting disabled children, especially ones with severe disabilities, is typically well beyond the financial means of most parents. They must rely on government programs to at least supplement the care they themselves are able to provide. The death of the disabled child’s parents adds to the dilemma. Such parents are no longer able to physically care for their child. How they continue to provide the financial safety net they provided during life is the subject of this chapter.

All but the wealthiest families must rely on government support to care for their disabled children. Supplemental Security Income (SSI), Medicaid, Medicare, and Social Security Disability Insurance (SSDI), though minimal, provide core support to disabled children. Eligibility for all of these programs is conditioned both the child’s incompetence as well as financial need.

It is not advisable to leave an outright inheritance to a disabled child. Any inheritance left outright to a disabled child would disqualify the child from government benefits. The child’s inheritance would have to be exhausted (to no more than $2,000 in most cases) before the child would again be eligible for government support. The disabled child, having lost his or her inheritance, would be worse off than when his or her parents were alive, since the safety net provided by the disabled child’s parents would be gone. All that would remain for the disabled child would be the poverty level government benefits.

During the 1970’s, parents were advised to disinherit their disabled children. Disinheriting a disabled child was thought to be the only way to avoid disqualification from government programs. Unfortunately, this approach exposed disabled children to the harsh realities of government dependency. Another approach was to bequest the disabled child’s share to a sibling with the tacit understanding that the inheritance was to be used to support the disabled child. While not disqualifying the disabled child from government benefits, this approach exposed the disabled child’s inheritance to a number of contingencies including the death, divorce, bankruptcy or dishonesty of the sibling. Amounts left to the sibling also caused potential estate and income tax complications for the sibling.

The planning device which best addresses the needs of disabled children is known as a “Special Needs Trust” (SNT) or “Amenities Trust.” These trusts make inherited assets available to a disabled child without disqualifying him or her from government benefits. Basically, a SNT directs the trustee to hold and administer trust assets to supplement rather than replace government benefits available to a disabled child. Assets held in a properly drafted SNT are not includible as a resource for SSI purposes.

To avoid disqualification, a SNT must provide that:

1. expenditures from the trust are wholly within the discretion of the trustee, and the disabled beneficiary has no right to demand income or principal; and
2. the trust cannot be used to provide items of primary support such as food, clothing or shelter.

Special Needs Trusts are used to provide specialized medical, optical and dental care, transportation, non-covered medications, travel and entertainment, physical therapy, occupational therapy, electronic equipment, monitoring services and other services not provided under government programs.

Just as important as creating a SNT, is the appointment of a Trustee who will properly execute the terms of the Trust. As noted above, expenditures from the Trust must be within the discretion of the Trustee, and the beneficiary may not have the right to demand trust income or principal. A Trustee unfamiliar with the government rules may make an unintended disqualifying distribution to the disabled child. The Trustee should make disbursements directly to the service providers, rather than to the disabled child.

A Special Needs Trust may also be used by an able child who wishes to leave a bequest to an ailing parent. Children wishing to provide for elderly parents should establish a SNT so as to not disqualify parents from Medicaid.

Medicaid is the government sponsored program which pays for long term nursing home care. Medicaid eligibility, like programs covering children with special needs, is based on financial need. An outright bequest could unintentionally disqualify a parent from Medicaid. Instead, a SNT should be used to supplement basic Medicaid benefits.

A Special Needs Trust may be established with the proceeds of a lawsuit brought on behalf of the disabled child. If the SNT is created prior to the disabled child’s actual or constructive receipt of the lawsuit proceeds, the proceeds will not be considered available for SSI and Medicaid purposes. The balance of a SNT funded with lawsuit proceeds remaining at the child’s death, must be used to reimburse SSI or Medicaid as for monies expended. By contrast, a SNT created by a parent may distribute the balance remaining at the disabled child’s death to siblings.

Certainly, the current climate does not suggest that government programs will expand to cover the disabled. Instead, care must be taken during the estate planning process to provide adequately for disabled children without disqualifying them from available benefits.