Don’t Make this Common Terrible Special Needs Planning Mistake

I was reviewing a client’s estate plan the other day, and was shocked to see this very common special needs planning technique.   It isn’t a rare technique, and it seems very natural but is often a terrible idea.  The document provided that the child with special needs was proactively disinherited.  More often then not it is a terrible idea to fully disinherit a child (who actually may be an adult at the time of draft) with special needs in favor of the other children.  Not only is it a terrible idea it could be actually be considered legal malpractice depending on the State you are in. (See Board of Overseers of the Bar v. Ralph W. Brown, Esq., 2002 Me. LEXIS 190 (Me. October 25, 2002)).

It i seems like a natural testamentary intent to say I will leave all my assets to a the typically developed child and he or she will take care of the child with special needs.  Why is it so dangerous?

What if the inheriting child has a creditor-judgement against him or her? Now those assets which were supposed to be used for your child with special needs benefit is subject to fulfilling a judgment.  Does the inheriting child own a business? is it possible that he or she uses the assets to prop that business up?

What if the inheriting child gets divorced? In some states inheritance is separate property for purposes of divorce, but that is not a permanent reality due to transmutation which is the process whereby separate property turns into marital property for equitable distribution.  How does it happen? Simple commingling can do it in some cases.  So typically developed child takes his or her inheritance and drops it in a joint account with their spouse – boom your child with special needs is now going to have their inheritance chopped in half because your son or daughter in law cheated on your child.

Wanting to do the right thing is not always enough.  Just because you know your typically developed wants to take care of your child with special needs doesn’t mean they are equipped with the tools to do so.  Maybe they are really good at the day to day activities but have they ever managed a portfolio?

How much do you trust their spouse?  Does the spouse have the right ethics, morals and care that your children have?

I know these are cynical “what-ifs” but it is such a ridiculous notion to include this in an estate plan when there is a simple solution.

What is a Third Party Special Needs Trust (Supplemental Needs Trust)

If your attorney can’t explain the concept, and you have a special needs child GET A NEW ATTORNEY.  Put succicently by NOLO,

A third-party special needs trust is the typical type of trust used to benefit a person with special needs.  Commonly, family members create a trust for a loved one with special needs and leave property in the trust through their estate plan (their will, trust, life insurance, or other beneficiary designation). Learn more about How to Leave Property to a Special Needs Trust.

The trustee of the trust uses trust funds to support the person with special needs. When doing so, the trustee must carefully abide by trust requirements – trust funds cannot be used for anything that would make the beneficiary ineligible for benefits, such as cash gifts.  But the trustee may use trust funds for many other things, including classes, hobbies, luxury items, personal services, furniture, professional fees, computer equipment, pet supplies, transportation, and vacations. The beneficiary never owns the property in the trust and does not have direct access to trust funds.

A 3rd party SNT is not to be funded by the assets of the child because that would make it is a self settled 1st party special needs trust which follows different rules (namely, Medicaid payback).  As indicated by the quote the funds are used to supplement the child’s life not supplant properly administered government benefits.

I know how easy it is to ignore this issue, but much like picking a guardian it is better you handle it now then allow the Courts to figure it out after you are gone!

4 Responses to Don’t Make this Common Terrible Special Needs Planning Mistake

  1. As someone who just paid for a trust, and is still working out the trust details, I am glad I do not have children. It is difficult enough to it for a single person without kids, everything else would be a nightmare…

  2. Wow! Good post!

    Friend of mine was just talking about a relative who croaked over in middle age, and, not expecting to do so, had failed to set up anything credible for her none-too-bright son. He was not exactly special needs, but he was described as none too smart, gullible, and given to hanging out with bad company.

    He was only twenty when he inherited several hundred thousand dollars. He disappeared from the scene — no one even knows where he is — after the money was swiftly mooched away from him by his drug-using, partying friends. Relatives believe the kid himself was not a user, but that he was simply too stupid to recognize his “friends” for what they were.

    In that case, she needed a trust.

    But not very many people understand that an inheritance can become community property if you just deposit in a checking account that has your spouse’s name on it. Or, presumably, in a mutual fund or brokerage account owned in common by spouses. If your kid is naive about money, the best thing you can do for her or him is set up your estate as a trust. You can do so without trying to control the person’s life, but in a way that will protect from exploitation.

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