Providing for Adult Children with Disabilities in a Traditional Estate Plan: Looking Beyond the Special Needs Trust
Probate & Property Magazine: Volume 27 No. 06
Webber Barton Roscher
Webber Barton Roscher is an associate with the Austin, Texas, firm of Osborne, Helman, Knebel & Deleery, L.L.P.
Ongoing advances in medical research and technology likely will result in children with developmental disabilities of all kinds living well into adulthood. As a result, practitioners must be able to plan for these special needs children (including adult children with special needs) when clients seek advice regarding their own estate plans and how to ensure that their children are cared for on a long-term basis.
It is a well-documented fact that life expectancies of individuals living in the United States have increased over the past 40 years. In 1970, the U.S. Census Bureau reported that the life expectancy of a male child born in 1970 was 67.1 years and of a female child was 74.7 years. U.S. National Center for Health Statistics (2010), Expectation of Life at Birth, 1970 to 2008, and Projections, 2010 to 2020, U.S. Census Bureau, Statistical Abstract of the United States: 2012, tbl. 104 at 77 (2012), available at www.census.gov/compendia/ statab/2012/tables/12s0104.pdf (last visited June 24, 2013). In contrast, male children born in 2010 have a life expectancy of 75.7 years (an increase of approximately 11.5% since 1970) and female children 80.8 years (an increase of 7.5%). Id.
The Census Bureau does not track data regarding life expectancies of individuals living with developmental disabilities. But anecdotal evidence and studies of particular groups suggest that individuals with developmental disabilities also are living longer lives (or, as in the case of autism, that the particular disorder does not affect life expectancy). In some cases the increased life expectancy is dramatic.
For example, in recent years, the life expectancy of individuals with Down syndrome has increased significantly. See National Association of Down Syndrome, Facts About Down Syndrome, www.nads.org/pages_new/facts.html (last visited June 24, 2013). In 1983, the median age at death for an individual with Down syndrome was 25 years. Q. Yang, S.A. Rasmussen & J.M. Friedman, Mortality Associated with Down’s Syndrome in the USA from 1983 to 1997: A Population-Based Study, 359 Lancet No. 9311, 1019, 1019 (2002). The average life expectancy for individuals with Down syndrome has now increased to between 53 and 57 years. Sheryl White-Scott, Developmental Disabilities: Inside Looking Out, American Association for Mental Retardation, June 24, 2003, http://aamr.org/ehi/media/whiteScott.pdf (last visited June 24, 2013). In the case of cerebral palsy, there is little research regarding aging. Cerebral Palsy International Research Foundation, Aging and Cerebral Palsy, Jan. 1, 2008, www.cpirf.org/?s=life+expectancy&.x=0&.y=0 (last visited June 24, 2013). It is reported, however, that between 87% and 93% of children born with cerebral palsy now live to be adults. Id.
Ongoing advances in medical research and technology likely will result in children with developmental disabilities of all kinds living well into adulthood. As a result, practitioners must be able to plan for these special needs children (including adult children with special needs), when clients seek advice regarding their own estate plans and how to ensure that their children are cared for on a long-term basis.
Use of Special Needs Trusts
Social Security’s Supplemental Security Income Program (SSI), Medicaid, and other government benefits can constitute the majority or all of the resources that are available to care for and support a special needs adult. It is very important that estate planning not compromise eligibility for these programs, but resources that are considered to be available to a special needs adult may reduce or eliminate the benefits he receives from these programs. Assets held in a properly drafted special needs trust (whether established and funded by a third party or by the special needs adult for his own benefit) are not considered resources available to the beneficiary. Accordingly, a special needs trust preserves eligibility for SSI and other government programs yet provides additional assets for the use and benefit of the beneficiary.
A third-party settled special needs trust generally is the centerpiece of any plan intended to benefit an adult special needs child. A self-settled special needs trust, which would be funded with the child’s own assets, can also be an effective planning tool. A discussion of self-settled special needs trusts, however, is beyond the scope of this article. For an excellent discussion of both third-party settled and self-settled special needs trusts, see Deborah Green’s article, Drafting SNTs: A Look at the Anatomy of Special Needs Trusts and How to Get Them Right, which also includes sample language for drafting special needs trusts. Changes and Trends Affecting Special Needs Trusts, February 9, 2012 (unpublished University of Texas CLE article).
Most estate planners are able to determine when it is appropriate to include a third-party settled special needs trust in a client’s estate plan, whether by setting up a special needs trust during life or by providing for the creation of a special needs trust at the client’s death. When an objective is to provide for a special-needs child on a long-term basis, however, other aspects of a client’s estate plan may require as much attention as the third-party settled special needs trust. These other considerations may not be as obvious, and the following are some examples of additional issues and techniques that may warrant consideration when estate planning is undertaken for parents or other family members of adults with special needs.
Planning Techniques and Considerations
It has become more and more common for the majority of a client’s wealth to be in retirement plans or individual retirement accounts. A common planning technique in a traditional estate plan is for clients to name each other as primary beneficiaries of retirement plans or accounts (if they are married) and to name their adult children as contingent beneficiaries. Naming an adult child as beneficiary of a retirement plan or account generally allows the child to set up an inherited individual retirement account for his or her own benefit on the client’s death and defer the payment of income tax for the longest possible period of time (based on his or her own life expectancy).
This type of planning, which is very favorable from an income tax perspective for most adult children, may not be appropriate for clients with an adult special needs child. If an adult special needs child is named as a beneficiary of a retirement plan or individual retirement account, the child’s receipt or ownership of the plan or account on the client’s death could make the child ineligible for government assistance programs, including SSI and Medicaid.
As mentioned above, clients typically give assets to a third-party settled special needs trust so that a special needs child can continue to qualify for government benefits. Although naming a special needs trust as a beneficiary of a retirement plan or individual retirement account is one option for planning with these assets, it may not be the best option. Naming most trusts, including third-party settled special needs trusts, as beneficiaries of these plans or accounts results in the acceleration of income tax when the account assets are paid to the trust. A conduit trust can be used to prevent the acceleration of income tax, but a special needs adult who is the beneficiary of a conduit trust likely will be disqualified from SSI and other programs.
If the adult disabled child is the only beneficiary of the client’s estate, naming a third-party settled special needs trust as the beneficiary of retirement plans or individual retirement accounts may be the best option for planning with these assets, regardless of the income tax acceleration. If the adult disabled child is not the only beneficiary of the client’s estate plan, however, it may be appropriate to leave different assets to different beneficiaries, rather than leaving an equal share of each asset to each beneficiary. For example, the client may leave his or her retirement plans or individual retirement accounts to a beneficiary or beneficiaries other than the disabled child and make an equalizing gift of other assets, such as life insurance, to the special needs trust. Of course, the clients’ ability to engage in this type of planning will depend on the size of the clients’ estate, the nature and value of other assets that are available to fund the special needs trust for the adult disabled child, and how much the clients want to pass to the special needs trust. If this type of planning is possible, however, each beneficiary could receive the assets that are most appropriate for his situation.
Life insurance can be a very desirable asset with which to fund a third-party settled special needs trust, as the liquidity allows the trustee of the trust the maximum amount of flexibility regarding the investment and use of trust assets for the benefit of the special needs child. Consideration should be given, however, to what type of life insurance product is appropriate when clients are trying to provide for a special needs child on a long-term basis.
Many clients purchase one or more term life insurance policies, particularly when they are young and have minor children. Term insurance can be desirable to have in place if there is an unexpected or premature death, because it can be used to cover ongoing expenses, such as mortgage payments and day care, and it can be used to pay for education, including undergraduate and postgraduate education. In other words, term insurance often is purchased to pay for immediate needs on a somewhat short-term basis.
Purchasing only term insurance might not be appropriate for clients who have a special needs child. If one or both of the child’s parents will continue to be the child’s primary caregiver(s), even when the child has reached adulthood, it may be advisable for the clients to purchase some type of permanent life insurance product. Permanent life insurance likely will be more expensive than a term policy, and it is necessary to review policy performance periodically, but the client should be able to count on the policy to provide for his or her disabled child, regardless of the client’s age at death. Having permanent, rather than term, life insurance in place also will prevent the client from having to qualify for life insurance each time a term policy lapses, which can become more difficult as time passes.
In addition to considering what type of life insurance is most appropriate, married couples with a special needs child also should consider who should be the insured. If one spouse is the child’s primary caregiver, and the other spouse works outside the home, it may be advisable to insure the life of the spouse who is the primary caregiver. Proceeds of this policy could be used to pay for continuing care of an adult disabled child if the caregiver spouse passes away and the surviving spouse must continue to work outside the home.
A second-to-die policy also might be an appropriate life insurance product for clients to consider when they are faced with providing for an adult special needs child. This life insurance could be used to care for the child even if the child outlives both parents. In addition, second-to-die policies can be more affordable than policies on the life of only one spouse.
Clients should carefully review beneficiary designations for any life insurance policies, whether term or permanent, to make sure that the proceeds pass to the special needs trust, rather than outright to the adult special needs child. A special needs adult who receives SSI and other government benefits probably will be disqualified from receiving these benefits if he receives life insurance proceeds outright. Attorneys should plan to review paperwork for any life insurance policies that are intended to be payable to a special needs trust.
Selection of Caretakers
It is very common for the parents of a special needs child to be faced with establishing a guardianship for that child when the child reaches adulthood. In the absence of a guardianship, the parents can no longer make medical decisions for the child and generally cannot manage assets on the child’s behalf.
When planning for clients who have a special needs child, consideration should be given to what steps the clients can take to ensure that the desired caregiver is put in place after their deaths. State law may allow a parent or guardian to include a provision in his will that names a successor guardian (or a series of successor guardians). A client also may be able to name successor guardians in the event of the client’s incapacity by executing a declaration of guardian for the child, which is effective during life.
In Texas, for example, a parent who is the guardian of the person of an adult child (the individual responsible for care and custody of the child) can execute a written declaration and include a provision in his will naming a successor guardian of the person, in the event of either the guardian’s incapacity or death. Tex. Prob. Code 677(b). The parent of an adult disabled child who is not the child’s guardian can include a provision in his will appointing a guardian, and the person selected by the parent will be given priority over the individuals otherwise entitled to serve as guardian under Texas law. Tex. Prob. Code 677(c).
Nonbinding Letter or Statement of Wishes
On a client’s death, there invariably will be some period of time, however brief, before formal planning tools (funding a special needs trust, payment of life insurance proceeds, appointment of a successor guardian) can be implemented. It may be advisable for the client or attorney to prepare a nonbinding letter or statement of wishes regarding care and custody of an adult disabled child. This letter or statement can provide instructions regarding various issues, such as (1) who should have custody of the child during any period of time when the successor guardian is not yet available to assume custody, (2) who is named as guardian and where the client’s declaration of guardian or will, as applicable, can be found, (3) what arrangements have been made for the child’s housing, (4) what, if any, dietary restrictions should be considered, and (5) whether any medications need to be administered.
If the client is serving as representative payee for the child’s SSI benefits, the letter or statement of wishes may say who the client would like to apply to serve as successor representative payee. The Social Security Administration (SSA) currently does not provide a mechanism for a representative payee to appoint a successor, and all representative payees must be selected by SSA.
A letter or statement of wishes is not binding on the individuals or organizations that may be involved with the transition of care from the client to third parties. Written instructions of this nature, however, can serve to make the transition as seamless as possible by allowing the new caregivers, whether serving in this capacity temporarily or permanently, to focus on the child, rather than trying to determine what arrangements have been made and what specifically needs to be done for the child on a day-to-day basis.
The programs and benefits available for adult children with special needs are complex, and the requirements to qualify may differ from program to program and state to state. Any parent providing care has accumulated a wealth of knowledge about the programs and benefits for which his or her child is eligible. Passing this information to the next caregiver will ease the emotional transition that certainly will occur on the loss of a parent. All individuals who may be involved with the transition of care should be given a copy of the letter or statement of wishes.
A special needs trust generally should be at the center of any estate plan prepared for clients with an adult special needs child. It is important, however, for an attorney who represents parents of an adult special needs child to dig deeper and consider how specific assets can be used most effectively to care for that child. This analysis generally will include practical, tax, short-term, and long-term considerations. Each situation is unique, and the particular plan that is suitable for specific clients will vary based on the nature of the child’s disability, the clients’ resources, and the larger family structure. The planning techniques discussed in this article are not intended to be an exhaustive list of strategies that should be considered or undertaken in every situation, but they may be a helpful starting point for practitioners representing parents of an adult special needs child.
If other family members, such as adult siblings or aunts and uncles, would like to provide for an adult special needs child in their respective estate plans, they should consider the same issues as the child’s parents. These family members should be advised about the importance of structuring their estate plans in a manner that will not compromise eligibility for SSI and other programs. They also should be encouraged to engage estate planning counsel who is familiar with the issues discussed in this article.