In last week’s edition of Retirement Watch Weekly, I presented Estate Planning for Those with Special Needs.
There are other important provisions for proper estate planning in this scenario, so let’s dive right in.
Living trusts become more important to those with chronic illness or conditions. These trusts allow a co-trustee to manage trust assets any time you are unable to without taking additional action.
They also allow you to be in control while the co-trustee performs ministerial tasks such as writing checks.
A living trust provides a smooth transition when needed as a successor trustee takes over when you are unable to handle the tasks.
With Powers of Attorney and living trusts, be sure to coordinate with your bank and other financial services firms.
They often require the documents to be on file with them and reviewed by their attorneys and might require the use of their own forms.
Your investment strategy also might need to be reviewed. The condition might change your income needs, risk tolerance, or time horizon.
If you have an investment advisor, he or she should be made aware of your condition and any changes it might require in your strategy.
Now, let’s look at the case when the person with the chronic condition is not the estate owner but a loved one.
Often, it is a child who has special needs that are likely to last for life.
The parents are concerned with how to provide for the continuing care in their estate plans.
A common mistake in these situations it that government programs will handle any shortfall.
For most special needs persons, the government steps in only if the person is impoverished and eligible for Medicaid.
Even then, only subsistence food, shelter, and medical care are provided most of the time.
It also can be problematic to leave assets to the other children with instructions to take care of the special needs child.
You don’t know what might happen. The other children might die first, or their assets could be dissipated in divorce or their own financial difficulties.
The first step usually is to have a life care plan drafted by the person’s doctor or other medical provider.
The plan provides a roadmap of how much support is likely to be needed over the person’s lifetime and when it is likely to be needed. This plan can be used to determine an investment strategy and trust terms.
The solution for providing funding usually is to set up a special needs trust.
This is a particular type of trust that is drafted so that it does not count as part of the beneficiary’s income or assets under government programs such as Medicaid.
A special needs trust might be set up with the special needs person’s own assets, such as when a child was injured in an accident and received a settlement.
Under the law, the person could qualify for Medicaid during life but after the person’s death Medicaid is reimbursed from the trust.
The special needs trust also could be set up with assets of others, such as the parents or the benefits of a life insurance policy.
Medicaid is not reimbursed from these trusts. Any remainder in the trust could go to the other siblings or other heirs.
With the special needs child, it is important to use an experienced estate planner so the will, trust, and any gifts do not make the child ineligible for Medicaid or other government programs.
A key term of the trust should be that it will provide only supplemental care beyond that provided by the government and any income the child earns.
Otherwise, the trust assets are considered the child’s assets.
You also should review beneficiary designation forms on your IRAs, annuities, life insurance, and any other assets.
Having the child listed as a beneficiary also could make him or her ineligible for Medicaid and other programs.
Finally, and usually most importantly, consider life insurance.
This can be used to fund the special needs trust. Or it can be used to provide for other heirs while leaving most of the estate to the special needs trust.
For younger parents, life insurance is key.
Otherwise, their estate is not likely to be enough to support the special needs child if the parents die prematurely.
I’ll address even more important estate planning strategies in detail in later issues of Retirement Watch Weekly. (Follow this link for Part 1 of Estate Planning for Those with Special Needs.)
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