A key part of our clients' potential planning needs that are unrelated to the economy or
to the estate tax is special needs planning. Whether you realize
it or not, you probably already have these clients. Or you have clients who
know someone who needs this planning.
Here, we will look more closely at the increasing need for special
needs planning, explain how you can work with a team in order to add a social
service element to your practice, and look specifically at the needs and
desires of your more affluent families with loved ones who require special care
or assistance. We will also look at how special needs planning can be an entry
to other planning opportunities across generations within the same family.
There is no doubt that the need for special needs planning is increasing. Just
look at these statistics:
- In 1992, there were 15,580
children ages 6-22 who were diagnosed as having what is now called an
Autism spectrum disorder. In 2006, the number was 224,594.
- In 2006, there were an
estimated 24.9 million adults in the United States with serious
psychological distress.
- Approximately 4.4 % of U.S.
adults may have some form of bipolar disorder during some point in their
lifetime.
- In 2006, an estimated 22.6
million people in the U.S. (9.2% of the population age 12 or older) were
substance dependent or abusive in the previous year.
Almost every family has at least one member (child,
grandchild, nephew, niece, parent, grandparent) who will always need help
managing personal care and/or finances. And since most of these conditions do
not decrease life expectancy, many families are seeking answers on how to
provide the best quality of life for their loved ones for the rest of their
lives . . . which could, for a young child, be 70 years or longer.
Fewer Programs Are Available
At the same time that the need for support services is increasing, government
and non-government programs are being reduced and even eliminated due to the
strain on state budgets, competition among entitlement programs, and pressures
to reduce deficit spending. Once a program is cut, it may be difficult if not
impossible to restore it in the future.
Families Are Motivated
Even families who are using them now do not trust that the programs that are
benefitting their special loved one will be there to provide the needed
benefits in the future. They are wisely (and fearfully) looking at alternatives
to provide those services. Common concerns are:
- Who will care for my loved
one when I am gone?
- Who will be my loved one's
advocate?
- Where will my loved one live?
- How much independence can be
maintained?
- Will the money last for my
loved one's lifetime?
Preserving Government Benefit Entitlement
Are government benefits for a special needs person worth preserving? For
families of lesser means, the answer is almost always, "Yes,
absolutely!" For more affluent families, however, maybe not.
It may be better to privatize the special needs person's care instead of
spending thousands of dollars to protect a few hundreds in benefits that may
not be available in the future. In the past, many practitioners focused
exclusively on preserving public benefits at all costs. Today, special needs
planning is not necessarily "poverty planning." The proper focus
today is, on a case-by-case basis, how to provide the best quality of life
throughout the life of the loved one.
How You Can Help
This critical area of planning can allow you to provide value and peace of mind
to your clients, and give you and your colleagues increased opportunities for
business that often spans generations. Careful planning is necessary to
supplement government benefits that are worth preserving; is flexible enough to
adjust to changes in future benefits; will preserve and expand assets; will
make sure the special person receives proper care; and may even save taxes. For
the affluent client, your goal is to put together a team of advisors that will
create a private social services system that replaces government benefits and
services.
Creating an Effective Team
Even the most perfectly drafted document cannot succeed without proper funding, implementation and review. For
the special needs trust, the implementation and review is especially critical
because it must accommodate an individual with unique needs for their lifetime.
Once the plan is in place, it will be need to be managed. Who should do that?
The ideal trustee would need to:
- use discretion in the best
interest of the disabled beneficiary;
- understand public benefits
and keep up with changes in the law;
- wisely invest and conform to
all statutory fiduciary requirements;
- understand taxes;
- keep perfect books;
- provide advocacy and prevent
abuse; and
- be immortal.
Since no one person could meet all of these requirements,
often the most effective solution is to divide the responsibilities into areas
and have a team of professionals work together. For example:
A Corporate Fiduciary Trustee for Accountability:
- keeps perfect books;
- carries insurance, is
bondable or has deep pockets; and
- is immortal.
A Care Manager for Beneficiary Advocacy:
- will use discretion in the
best interest of the disabled beneficiary;
- must understand public
benefits; and
- provides advocacy and
prevents abuse.
A Financial Advisor for Risk and Investment Management:
- can invest wisely and can
conform to all statutory fiduciary requirements; and
- understands taxes.
Team Model #1: Trust Advisory Committee
Often a professional trustee will manage the funds, make distributions, prepare
tax returns and keep the records, but will be directed by a Trust Advisory
Committee that makes distributions, can amend the trust or replace the trustee.
A care manager can also be on or engaged by this committee.
Planning Tip: Many parents think a sibling would be
the best trustee, but this is rarely a good idea. Most individuals are just not
prepared to handle those responsibilities. A professional trustee will, in the
long run, be less expensive than dealing with the mistakes that are often made
by a well-meaning, but inexperienced, family member. Also, some siblings may
find themselves torn between using the trust assets to provide for the disabled
dependent and preserving them for the remainder beneficiaries - especially if
the trustee is one of the remainder beneficiaries. It's usually better to have
a professional as trustee, and have the family member be on the Trust Advisory
Committee.
Model #2: The trustee can be directed by a care manager.
In this case, the trustee would manage the funds but would be directed by a care
manager who interacts with the beneficiary. A trust protector or advisor would
oversee the trustee and care manager from a distance and can replace either for
any reason.
Planning Tip: The role of the care manager can be
critical. In most families, one parent (most often the mother) has been a
fierce advocate for the child, actively seeking benefits and supervising the
child's care and progress. The care manager will assume this role and will
become the beneficiary's advocate, seeking and evaluating benefits and
programs, supervising care providers and preventing abuse. Selecting and
implementing a care manager while the parents are living will give families
peace of mind that their loved one will continue to have the quality of life
they so strongly desire.
Planning Tip: Using a stand alone third-party trust
(instead of embedding the special needs trust in the parents' revocable trust)
will allow other family members to make gifts to support the beneficiary. This
trust can be activated while the parents are living or at the death of the
first parent. It will also allow the donor to decide who will receive any funds
that are not used to supplement the needs of the beneficiary.
Planning Tip: Special needs planning includes the
opportunity to plan across generations within the same family. Grandparents
often want to provide for a special needs grandchild; aunts and uncles may want
to help, too. Plus, the special needs discussion can open doors to discussions
about other estate planning needs.
Planning Tip: Consider calling the trust
"discretionary" trust instead of "special needs."
"Special needs" historically has meant needs not met by government
entitlement programs. Not all disabled beneficiaries want or need government poverty
program benefits.
Funding the Trust
Life insurance on the life of a parent or grandparent is often used to fund
these trusts. However, tax planning combined with special needs planning can
present some unique opportunities. For example using an IRA or 401(k) account
to fund one of these trusts can offer tax advantages while at the same time
creating drafting challenges (because the trust usually has to be an
accumulation trust to preserve government benefits).
Charitable lead trusts also have application in this context (income goes to
the charity, remainder to the special needs trust). Special needs families are
often grateful to organizations that have provided assistance and benefits to
their child and to them, and are eager to help make sure they can continue to
provide these services to not only their loved one but to other families in the
future.
Planning Tip: Affluent clients will be able to
provide more opportunities for their special needs beneficiary. For example,
they might consider putting a residential property in the trust to guarantee
their loved one will always have a familiar, safe home.
Managing the Trust
Careful investment of the trust assets is critical. Risk tolerance is
especially low for these trusts, since loss of these assets could be
catastrophic for the beneficiary.
The trust's assets will need to earn or grown enough to meet the plan's
objective to provide for or supplement the beneficiary's care. At the same
time, care must be taken because of a trust's very narrow brackets for ordinary
income.
Trust income can be distributed to or for the benefit of the beneficiary in
such a way that it is taxable to the beneficiary (because the beneficiary will
typically be in a much lower tax bracket). However, care may need to be taken
so that the distribution does not unintentionally jeopardize any public
benefits the beneficiary may be receiving. Often this can be accomplished by
the trustee paying care providers directly.
Planning Tip: Use of Crummey withdrawal powers in
this type of trust may jeopardize the beneficiary's eligibility for government
benefits.
Resources
Take advantage of the many free resources and publications available, including
those from:
- National Association of
Professional Geriatric Care Managers (caremanager.org)
- National Alliance on Mental
Health (NAMI) (nami.org)
- Stephen Dale (Dale Law Firm,
PC) (achievingindependence.com)
- The Arc of the United States
(previously Association of Retarded Citizens) (thearc.org)
Whether you realize it or not, you probably already have these clients. Or you
have clients who know someone who needs this planning. Bring it up at every
planning meeting. Plant the seeds that you are aware and have the resources to
help.
Conclusion
Special needs planning for the affluent creates unique planning opportunities
and challenges for the entire planning team. By working together during the
design, implementation and administration phases, the planning team can ensure
that the special needs beneficiary receives the level of care needed and
desired by the family.
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