Future Reflections Fall 1995, Vol. 14 No. 3
WHAT PARENTS OF CHILDREN WITH DISABILITIES SHOULD KNOW
By Greg D. Trapp
[PICTURE] Greg Trapp
Editor's Note: Greg Trapp is a 1990 graduate of the University of New Mexico School of Law. After passing the 1990 bar exam, he began work as an Equal Opportunity Specialist at the University of New Mexico. Mr. Trapp has been a staff attorney with the Protection and Advocacy System of New Mexico since 1992. In 1993 he taught Disability Law as an adjunct professor at the UNM School of Law. He is currently on the Board of Directors of the National Association of Blind Lawyers, is the second vice president of the Albuquerque Chapter of the NFB, and serves on the New Mexico Commission for the Blind's statewide rehabilitation advisory council.
Do you have a will or living trust? Have you selected a guardian for your minor children? For most Americans the answer to these important questions is "no." Yet, of all of the reasons why you should have an appropriate estate plan, none is more persuasive than the benefit to your children. Without a proper estate plan, your minor children face an uncertain future. Would their inheritance be prudently managed? Who would the court appoint as their guardian? A proper estate plan can answer these and many other questions. However, if your child is disabled, then it is even more critical that you have a proper estate plan.
While it is a good idea for everyone to have a proper estate plan, there are some major life events which make estate planning even more urgent. These major life events include getting married, the birth of children, moving to another state, getting divorced, and the sale or acquisition of significant property. Of course, the disability of a child is also such a major life event. In general, it is a good idea to have an attorney review your estate plan about once every five years, and more often if you have experienced one of these major life events.
As you consider your estate planning options, it is important that you understand the benefits and programs that your disabled child might be eligible to receive. For example, Supplemental Security Income (SSI) is available to disabled children whose parents have limited income and resources. In most states, eligibility for Medicaid is automatic upon eligibility for SSI. Despite the restrictions placed on the amount of allowable income and resources, many families of modest means may find that their disabled children are eligible for SSI or Medicaid.
Even some disabled children in more affluent families might be eligible for SSI or Medicaid. For instance, while SSI counts step-parent income, Medicaid does not count the income of a step-parent. Thus, a disabled child could be eligible for Medicaid benefits despite a large family income. A disabled child in a high income family could also be eligible for SSI and Medicaid were the child to be in long-term hospitalization. For instance, a premature infant requiring several months of hospitalization might be eligible for SSI and Medicaid. Prematurity is a major cause of blindness and many premature infants could be eligible for SSI and Medicaid.
SSI also does not count some resources used to earn the family income. Farm equipment, for example, might not be counted making some farm families eligible for SSI. Even if your income is currently too high to be eligible for SSI, you should keep in mind the fact that your earnings will cease upon your death at which point your disabled child might then be eligible for SSI.
Should you die while your child (regardless of disability) is still under the age of eighteen, then he or she might be eligible for survivor's benefits under your Social Security contributions. If a disabled child's biological or adoptive parent begins to receive Social Security retirement or Social Security Disability Insurance (SSDI), and if the child became disabled prior to the age of twenty-two, then he or she might be eligible for SSDI and, after two years, Medicare.
In addition, your disabled child may also be eligible to receive educational equipment and services through your school district's special education program. Once your child reaches working age, then he or she might also be eligible for vocational rehabilitation services. Since your disabled child might be eligible to receive vocational rehabilitation services, it may be inappropriate to use a trust to pay for a college education. Instead, you might decide to provide for your disabled child's other needs, or for the college education of a non-disabled child. However, if you want your disabled child to attend an expensive private college or a university in another state, you might want to use a trust to specify that your child's inheritance be used to cover the tuition and other costs not covered by your state vocational rehabilitation agency. With cuts in vocational rehabilitation services likely, it is probably prudent to use a trust to plan for the day when vocational rehabilitation services will be less generous. By understanding programs such as SSI, SSDI, Medicaid, special education, and vocational rehabilitation, you will gain a better idea of the future needs of your disabled child. This understanding will help you to plan your estate. For example, you might want to purchase additional life insurance as a method of providing for your disabled child.
The creation of a simple will is usually the first step taken toward acquiring a proper estate plan. You can probably obtain a simple will for less than two hundred dollars. However, the presence of a disabled child might make a simple will inappropriate for your situation and add significantly to the cost of acquiring a proper estate plan. Yet, the additional cost could be more than outweighed by the saving to your surviving family and in the peace of mind gained in knowing that your disabled child will have a more secure future. As you contemplate your estate planning options, you should probably also consider the possible benefits of a living trust. A living trust is a trust which takes effect during the lifetime of the creator of the trust. After you place your property into the trust, the property is then managed for the benefit of the persons named in the trust. The typical living trust is managed by the creator of the trust for his or her own benefit. Upon the death of the creator of the trust, the property contained in the trust automatically transfers to the person named as the successor trustee. The primary advantage of the living trust is that it helps to avoid probate by automatically transferring the property. The main disadvantages of a living trust are that it is initially much more expensive than a will, and all property must be titled in the name of the living trust. In addition, a living trust does not eliminate the need for a will since a will may be needed to transfer property not titled in the name of the trust at your death.
A will may also be needed to appoint a guardian for your minor children. For most young persons who have a small and uncomplicated estate, a simple will is normally going to suffice. Your exact requirements will primarily depend on the age of your disabled child, his or her maturity and independence, his or her health, the ages and needs of your other beneficiaries, your own age and health, your marital status, your family income, and the size of your estate.
It is important that you understand the differences between the major types of trusts. Many people make the mistake of assuming that any trust will protect eligibility for SSI and Medicaid. However, only a special needs trust will preserve SSI and Medicaid eligibility. Most persons are more familiar with testamentary trusts. A testamentary trust is a trust which is normally made at the same time as a will. A special needs trust can also be a testamentary trust. However, a special needs trust does not have to be a testamentary trust. A special needs trust can also be used to protect a gift or legal settlement. If your disabled child was injured in an accident, and if there will be an insurance payment or damages award, then you may need to divert the proceeds into a non-testamentary special needs trust. This must be done prior to receipt of the payment. Failure to have the payment transferred directly into a special needs trust may cause your disabled child to be ineligible for SSI and Medicaid. However, for purposes of this article, the use of the special needs trust is discussed in the context of estate planning.
In order to be a special needs trust, the disabled beneficiary cannot access or control the trust property. The Social Security Administration does not consider trust property to be a "resource" belonging to the trust beneficiary if the beneficiary is unable to revoke the trust and does not have direct access to the property. A special needs trust can pay for items such as college tuition, medical care, home improvements, entertainment, certain types of insurance, transportation, or even vacations. The trustee can also make cash distributions to the trust beneficiary. However, cash which is distributed directly to the beneficiary will be counted as income. Cash received directly from the trust might result in a reduction or elimination of SSI benefits. Payments for items such as food, utilities, and shelter will also be counted as income and could result in a reduction in SSI benefits.
A special needs trust can also be used to qualify for Medicaid. Medicaid can pay for medical expenses which could otherwise rapidly exhaust your estate. In the case of a child with serious medical problems, Medicaid eligibility can save hundreds of thousands of dollars. In order to maintain Medicaid eligibility, the trust must limit the amount that the trustee is allowed to distribute to a level below the maximum income amount allowed by Medicaid.
The trustee must also keep in mind the fact that trust distributions could cause ineligibility for SSI and thereby also cause ineligibility for Medicaid. The trust should state that the purpose of the trust is to supplement state and federal entitlement programs and to pay only for those items or services not paid for by the entitlement programs. Since the trust places complete control in the trustee, you should take great care when deciding whom to name as trustee.
The appropriateness of a special needs trust will primarily depend on your income, your marital status, your child's age, your child's health, your child's maturity and independence, the number of children you have, and the amount to be placed in the trust. A special needs trust will be most appropriate for families who have a financial need for the SSI payment or who need Medicaid to cover medical expenses. A special needs trust is more likely to be suitable if the assets to be placed into the trust are relatively modest, or if your child is an adult receiving SSI benefits. For a disabled child with few medical expenses, the $458 monthly SSI payment might not be worth protecting if your child would otherwise receive a large inheritance. Use of a trust to shelter larger inheritances may be appropriate if your child has a need to qualify for Medicaid, or if your child is unable to spend or otherwise enjoy the inheritance.
Consideration should probably be given to trust alternatives. One possible alternative is to disinherit your disabled child and then increase the share of a trusted family member with the understanding that the family member will use the increase for the benefit of your child. This alternative is risky since the heir receiving the increased inheritance might turn out to be untrustworthy, might lose the inheritance to bankruptcy, or might lose the inheritance to a civil lawsuit. A gift to a trusted family member with the same understanding is a similarly risky alternative. In both cases, the tax consequences must be considered.
Another trust alternative may be the use of an SSI work incentive called the Plan For Achieving Self-Support, or PASS. The PASS can allow income and resources to be exempted in order to achieve the goal of becoming self-supportive. A PASS may enable your child to become or remain eligible for SSI and Medicaid. A PASS can also be used in combination with a special needs trust. A PASS is more flexible than a special needs trust in that the PASS can be funded from assets already in your possession or in your child's possession. A final alternative to a special needs trust is the purchase of a non-countable resource such as a home. The purchase of non-countable resources can also be used in combination with a special needs trust.
It might be helpful to use a hypothetical situation to illustrate the benefits of a special needs trust. Take, for example, the situation in which a father earned $25,000 a year and the mother remained at home to care for her two children, one of whom was disabled. The father had a $20,000 life insurance policy through his employer and designated a special needs trust as the beneficiary of the policy. The father also purchased additional life and disability insurance to pay off his home in the event of his death. As a result of his diligent estate planning, after his death the family home was paid off, the mother was able to earn a modest salary, the disabled child received SSI and Medicaid, and the $20,000 contained in the special needs trust was saved for emergency and educational purposes. It should also be remembered that the mother and children might also have received Social Security survivor's benefits, but probably not in an amount which would have precluded the disabled child's SSI and Medicaid eligibility. If this father was thorough in his planning, then he would also have created a durable power of attorney and living will. The durable power of attorney could authorize his wife to make any necessary medical or financial decision, and the living will could help clarify the father's medical treatment wishes.
As you develop your estate plan, you should not assume that your attorney has considered the use of a special needs trust. It may even be a good idea to have a second attorney review your estate plan. Your nearest disability advocacy organization, legal aid society, or senior citizen's law center might be able to provide you with estate planning services or advise you in developing your estate plan. If not, then they might be able to refer you to an attorney familiar with special needs trusts. While everyone hopes for a long life, should death come early, proper estate planning can dramatically improve the future for your surviving disabled child.
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