With a desire to be fair to all of their children, parents will often plan to divide their estate among them, leaving an equal portion to each.
“But if one child has special needs, an equal division of assets can result in the loss of that child’s government benefits, such as Social Security Income and Medicaid,” says Bernie Garrah, a financial adviser and Special Care Planner at Skylight Financial Group. “Instead, parents should consider setting up a supplemental needs trust.”
However, if the parent is also a business owner, that can complicate things further.
“If you have a child with special needs, that child is most likely receiving government assistance,” says Garrah. “And if you don’t structure the inheritance properly, he or she could be disqualified from receiving aid.”
A supplemental needs trust allows a parent to leave unlimited assets to be used for the benefit of that child over his or her lifetime. Assets in the trust are not counted when considering qualification for government benefits and are intended to provide supplemental care beyond that provided by the government to enhance the quality of life.
Smart Business spoke with Garrah about how to structure a trust to care for a child with special needs without impacting government assistance.
Who should establish a supplemental needs trust?
Almost anyone with a child with special needs can benefit by setting up a trust to protect the future of the child.
There are a few instances in which it might not be necessary; for example, if the person leaving the assets doesn’t have much to leave and isn’t worried about funding the child’s future, or if the person is so wealthy that the interest earned on an investment portfolio is enough to maintain the child’s standard of living after the parent is gone.
However, for most, establishing a Special Needs Trust makes sense in order to take care of the child’s supplemental needs without endangering his or her government benefits.
What are the first steps to creating a trust?
The first step is to select advisers who specialize in the area of special needs. The accountant needs to be familiar with how to manage the tax return, the attorney has to be well versed in special needs planning, the investment person has to make sure that he or she is not recommending increasing the amount of assets in the child’s name without knowing the child’s diagnosis and prognosis, and the insurance agent has to know that he or she can’t just do a blanket beneficiary election form in which all of the children are named as contingent beneficiaries.
If you buy life insurance when you start a family and the child isn’t diagnosed as severely autistic until age three, you need to call your insurance agent to alter the beneficiary election of that policy. If you don’t, and you die, that becomes a problem for the child.
The right advisers can also steer you toward the most appropriate nonprofits for the child’s needs, whether it’s speech therapy or obtaining an adapted vehicle to allow that person to drive.
Who administers the trust?
When setting up a trust, you should name a corporate trustee who knows what’s allowable without disqualifying the child. And if the trustee makes a mistake, you can sue.
Uncle Bob may be a great guy, who wants what’s best for the child, but he probably doesn’t know the Medicaid laws or how to manage the money so that there’s enough income generated to support that child’s lifestyle. The laws are constantly changing and the government is always trying to close as many loopholes as possible, so it really needs to be done by the book. If you’re using an adviser who doesn’t specialize in this area, he or she could miss something, which could then jeopardize the entire estate plan.
That’s why financial planning needs to be done with reviews on a semi-annual basis. Diagnoses change, family dynamics change, health changes, the environment changes, and the economy changes, all of which can have an impact on your plan.
What advice would you give a young business owner who is reluctant to tackle this issue?
You’re young and you’re healthy, but you can’t fight Father Time. You will get older. When do you think it makes sense to address it? When you’re older and your options are fewer? Or now, when you’re younger and healthy and you have more options to consider? Many people may not want to deal with it, but the situation will not go away.
What common mistakes do business owners make when planning for the distribution of their assets?
For example, a business owner has three children and wants to leave assets equally to the children, so he or she just splits the beneficiaries into thirds. But if one of those children has special needs, that can impact the growth of the business and the sustainability of the business, and create a family dynamic that may not be very desirable when you’re trying to manage a company.
Typically, we don’t advise people to leave a portion of the business to the child with special needs. If the business comprises the majority of your net worth, you may have to look at alternative funding sources to create a source of money for the care of the special needs child. In many cases, the way to do that is through life insurance with a policy on the business owner. An adviser can help you do an analysis to determine which solution makes the most sense for you.
Bernie Garrah is a financial adviser and Special Care Planner at Skylight Financial Group. Reach him at firstname.lastname@example.org or (216) 592-7360. The information provided herein is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel. Bernie Garrah is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, Inc. member SIPC. 1660 W. 2nd St. Ste 850, Cleveland, OH 44113, (216) 621-5680. CRN201208-138384