Estate Planning for Those with Special Needs

Estate Planning often focuses on healthy people and their families. Many families, however, have one or more members with chronic illnesses or conditions. That changes the estate planning equation. The person with the illness or condition might be the estate owner or a loved one of the owner, especially a child. In either case, the estate planning strategy requires some adjustments and special considerations.

First, we will focus on the case of the estate owner who has the chronic condition or disease.

The initial task is to determine whether the disease is likely to lead to a cognitive or mental decline or the effects primarily are physical. This is important, because when the effects primarily are physical the owner can retain control of decisions longer. When the effects are cognitive, the estate planning documents need to be developed and signed sooner rather than later. Otherwise, the documents are easier to challenge. In addition, the powers of attorney become more urgent as are the selections of the decision makers or agents. When documents are signed, have your physician write a letter affirming that you were competent at the time.

When the disease can affect handwriting, by making it shaky for example, some attorneys advise that you execute an affidavit explaining the changes in your signature.

You need a separate financial power of attorney and health care power of attorney. These documents appoint people to make decisions in these areas when you are unable. We have discussed these documents in some detail in the past, and those articles are on the web site archive.

A key point is you probably want separate people for these tasks, because the person you want making medical decisions might not be competent to make financial decisions and vice versa. You also should consider appointing two or more people under each document. Some people believe a committee of trusted people will result in better consideration of all the factors and better decisions.

Another key point is the agents must be prepared to perform the tasks for a long time, since you are known to have a chronic condition. You also want a mechanism for appointing successor agents, since the status of the agents can change over the years. Because of the long time and effort that might be involved, you might consider paying even relatives to perform these tasks.

While Living Wills and medical powers of attorney are common estate planning documents, preparing them takes more care for those with chronic conditions. You might be able to customize them, because you will have more knowledge of the future path of your health. For example, many POAs or living wills state flatly the person does not want special life extension care in case of a terminal illness. But some terminal illnesses do not affect mental function. You might prefer to receive treatment if you know you will be mentally alert. You also might decide you want any experimental treatment that becomes available. The point is that knowing you have a specific condition means your medical care documents can be customized. Even when you have existing documents that after a review seem to meet your needs, it is a good idea to re-execute or reaffirm them to forestall any arguments you did not consider the issues in light of your illness.

Financial accounts should be consolidated. I advise this for everyone, but it seems especially important for someone with a chronic condition. Consolidation simply makes life easier and reduces the potential for oversight and mistakes.

When periodic hospitalization or other treatments are likely, you might need to prepare a series of temporary limited powers of attorney. You want someone to be able to pay bills and perform other necessary tasks when you are not able to.

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 POAs 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 SNT 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 SNT 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 planning advisor 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 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.

Finally, consider life insurance. This can be used to fund the SNT. Or it can be used to provide for other heirs while leaving most of the estate to the SNT. 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.

RW September 2009.