Estate Planning for Children with Special Needs

Part One: For Parents

Drew and Libby have two children, Becca and Corky.  Corky has Down’s Syndrome.  Although he is on the high end of moderate functioning, he won’t be able to handle more than a minimum-wage job.  Outside of being able to purchase small items at convenience stores, he has little understanding about financial affairs and does not have sufficient skepticism to avoid being exploited by others.  They are both concerned about how to provide for Corky when they are gone.

There are three choices available to Drew and Libby.  The first option is to leave Corky an inheritance outright in his name.  This option is disastrous but occurs too often in our world.  When they die, Corky will be automatically disqualified from needs-based government benefits, such as Supplemental Security Income (SSI), Medicaid and Section 8 housing.  These benefits can insure that he has a source of income, housing and medical care.  However, in order to be eligible for these benefits, Corky cannot have more than $2,000 in his name.  Receiving an inheritance will violate this condition of eligibility.  Moreover, Corky could fall prey to a so-called “friend” who could scam him out of his money.

The second choice is that Drew and Libby can leave their entire estate to Becca.  Becca loves her brother and promises to take care of him when they are gone.  However, there are enormous risks with this option.  Becca could predecease Corky.  Becca could be married to a spendthrift who mismanages and depletes the inheritance.  Becca could be a spendthrift herself or subject to the claims of creditors.  Although Becca loves her brother, she many spend some on herself to compensate for the extra attention Corky received from their parents while they were alive.

The third choice is a trust.  There are a variety of trusts.  However, the two primary types are known as a support trust and a special needs trust.  A support trust appoints a third party to manage Corky’s inheritance and states that it can be used for his health, support and maintenance.  Although  this should protect Corky from exploitation, it will disqualify him from government benefits.  These trusts are occasionally appropriate but they are more often than not drafted accidentally by an attorney not qualified to handle proper estate planning.

The optimal trust is almost always what is known as a special needs trust.  A special needs trust affirmatively states in its language that it is to be used to supplement rather than replace government benefits.  To be valid, it must meet a number of criteria such as being irrevocable and subject to the sole discretion of the trustee as to decisions regarding distribution.  Payments are to be made to third parties for goods and services on behalf of Corky rather than directly to Corky. It should be drafted to reflect Corky’s abilities as well as his limitations.  Without question, though, this is the optimal result for Corky, as it will allow him to keep his benefits, yet allow for a fund to enhance his quality of life.

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