7 Traps and 5 Power-Ups

Special Needs Estate Planning

There are multiple traps, myths, and outright falsehoods when it comes to estate planning for a special needs beneficiary, and it doesn’t help when these lies spread like wildfire. But why do they spread? Usually, because someone had a single good or bad experience they wrongly translate that to be a universal truth that everyone should follow.

For example, many of my clients have adult children with special needs who receive Medicaid as their health insurance or some other public benefits. This means that their income must remain below a certain threshold and their bank accounts can’t grow too large. However, adults with special needs often find great benefits in working, earning some money, and the socialization that comes along with having coworkers. But if during one pay period, their child works an extra shift, they get paid more, and their deposit makes the bank account exceed the benefits program’s limit, they get kicked off Medicaid until the money is spent down. They may even have to reapply for Medicaid. The parent, after having to deal with a ton of red tape, may start cautioning other parents. “Don’t let your child work!” they’ll say. “They’ll make too much money, and they’ll lose their benefits!”

This one bad experience led them to the extreme conclusion that their child shouldn’t work at all when the real lesson is to not take an extra shift and to monitor work hours and pay closely. When it comes to special needs estate planning there are many such myths. However, there are also some incredible solutions that will allow families to plan their estates to help beneficiaries with special needs live the best life they can after they have gone. Here are the top seven special needs estate planning traps as well as five solid solutions, or “power-ups.”

Trap 1—Cutting Out Beneficiaries

The biggest and most popular trap in estate planning for a beneficiary with special needs is believing that you can’t provide an inheritance for them at all. After all, giving someone receiving disability or Medicaid a bunch of money is a sure way for them to lose their benefits, and lose the inheritances paying for things their benefits would have handled until all of the money is spent. When looked at from that point of view with no other context, it does look like leaving money to an adult child receiving benefits is a bad thing to do. However, there are plenty of legal ways to provide an inheritance that does not put the money in the direct control of the beneficiary so they can get the support they need without having to actually have the cash in their pocket (or their bank account.)

Trap 2—Leaving Assets to Others to Provide Support

As a way to get around the disability and Medicaid program’s harsh denial of benefits if an inheritance is received, I often hear of families “leaving the inheritance with another child.” So if a couple with three adult children has one child with special needs and benefits, they’ll leave two-thirds to the oldest child, a third to another child, and nothing to the child with special needs. They’ll then tell the oldest child to take care of their sibling with the extra third they are providing. With all of the good intentions the family may have, life may have other ideas. What if the oldest child dies and leaves their entire estate to their spouse? Will the spouse carry on this role? What if their children need help with college? Are you sure they wouldn’t tap into that money to care for their own children rather than their deceased spouse’s sibling? Without an actual trust in place, and consequences for the trustee if the money is diverted, there is a very real danger that the funds could end up going where you didn’t want them to go.

Trap 3—Using a Last Will and Testament

Medicaid and other government benefit programs have their own measure of red tape, but so does the probate court system. When someone passes on using a Will as their estate plan, it means that their assets go through that court system, which has several big downsides: 1) probate generally costs 4-10% of an estate, 2) it generally takes 6 months to a year and a half to finish, 3) it’s more open to being contested, and 4) all accountings and inventories are publicly available since they are court documents. (For more on this, check out my book Estate Planning Basics at?https://www.EstatePlanningBasicsBook.com ). This also becomes a pain for the executor of the Will.

What makes using a Will even worse is that any trust set up in the terms and conditions of the Will often ends up requiring the court to supervise that trust?for the life of the beneficiary?with many of the same downsides on an ongoing basis. So if you leave an inheritance to a beneficiary with special needs, and they live another 30 years, then the court oversight and red tape will also last another 30 years.

Trap 4—Obtaining Guardianship

For many parents, it becomes a frustrating experience to help their child with special needs for eighteen years and then be told by banks, doctors, and other institutions that they can no longer speak to you on your child’s behalf. These organizations rightly tell the parent that they now have to deal with their adult child… unless the parent obtains guardianship. This is a huge trap with a lot of drawbacks that people don’t generally think of. First, once guardianship is obtained, the adult child loses the ability to represent themselves, and guardianship is now an ongoing obligation without end and is no longer a matter of convenience.

Second, there are often two types of guardianship in the law where being a guardian of the person means you handle all medical and personal oversight, and then there is being a guardian of the “estate,” meaning handling the money and reporting on finances to the court. I have heard of many parents going for just the guardianship of the person since it is generally simple, and not being the guardian of the estate since it is more difficult and has ongoing reporting. Now problems pop up with businesses not wanting to deal with the adult child since they are under a “guardianship,” but at the same time, they can’t deal with the parent because they don’t have guardianship of the estate. So we’re stuck in a red tape feedback loop until guardianship of the estate is obtained.

So what can you do? If the adult beneficiary with special needs is legally competent to execute their own power of attorney documents, then they can name the parent as their agent in their health care power of attorney and their durable general power of attorney. The parent can now use the documents when needed, but at the same time, their adult child has not lost their own autonomy. Even better, the court is not involved, and the usual costs and frustrations of guardianship are not there.

Trap 5—Mandatory Distributions for HEMS

Unfortunately, there are a lot of “special needs trusts” out there that contain standard language about caring for the Health, Education, Maintenance, and Support of the beneficiary (commonly shortened to H.E.M.S.), and many attorneys who “dabble” in estate planning will transfer this language into a Will or Trust for their clients. This is actually a horrible idea, and it’s misapplying language for one purpose versus another. How? The language makes it mandatory for the trust to expend its assets to pay for those things for the beneficiary that are considered a “need,” but it will protect the beneficiary from inheriting everything and spending it recklessly.

So if the beneficiary is on Medicaid, then this trust language mandating that the trust pay for health expenses can cause Medicaid to deny paying for those expenses because the trust is available to handle those costs. It is far better for trusts to leave the money for the beneficiary to be expended in the “sole and complete discretion” of the trustee. This means that the government cannot say the funds are available to the beneficiary in any way that the beneficiary can control the money. The trustee can then, and should, refuse to pay for anything that Medicaid should be paying for, and then only spend money on the?extra?quality of life expenses.

Trap 6—Detailed Distribution Terms

Many parents of adults with special needs develop workable, regular routines with their family, and they want these same routines to continue forever even after they are gone. This causes some people who are planning their estate to put these specifics into their trust. Life changes, even if there isn’t a death, so I typically counsel flexibility. This is particularly true with the people you trust enough to put them in charge of the money you are setting aside for a beneficiary with special needs. Trying to force specifics into the trust rather than giving the trustee the ability to adapt to changed circumstances is going to make their job much harder.

Trap 7—Not Planning an Estate Holistically

Over the decades I have been working with parents of children with special needs, I have often found that the parents are so laser-focused on helping this one child that they are not thinking broadly enough when it comes to estate planning. In fact, some couples (who haven’t reviewed my book or videos) will seem downright confused when I start mentioning what their wishes are for each other and the other children for their estates, and some have responded, “We’ll worry about that after we plan for this one child,” they’ll say. “Just set up a special needs trust first.”

Estate planning should be treated like a major surgery in that if you are going to “cut someone open,” then you should take care of everything that can and should be done all at once to avoid multiple surgeries. If we treat estate planning as, well, a plan, and not just several different actions or documents, then your wishes and goals can be enacted in a comprehensive and coordinated manner.

These seven traps are easy to fall into, especially since most people who have children with special needs are more focused on other things and not consistently thinking about estate planning. However, there are five big power-up techniques that can help make the most of a comprehensive estate plan.

Find out about the 5 POWER-UPS on my website blog here https://livingtrustlawfirm.com/7-traps-5-power-ups/