Estate planning may be more complex for parents whose heirs have mental disabilities or other impairments that limit their ability to take care of themselves. The unique requirements of special needs children constitute a large and growing niche. The U.S. Census Bureau reports that 10 percent of American families have a special needs child with a physical, emotional or mental disability, and 60 percent of parents expect that these children will never be financially independent.
Parents of special needs children look to craft plans that provide for the children's financial needs without disqualifying them for valuable government benefits. They also must provide a guardian to manage the assets left to the children if the heirs are unable to manage their own affairs. There are tax consequences to consider as well.
Special needs families have to bear significant financial costs associated with housing, basic living needs and medical care that are likely to endure throughout the child's lifetime. Yet more than 60 percent of these parents have yet to begin planning for their child's financial future. Many haven't even written a will.
But advance planning isn't only about lifetime care; it's also about quality of life. An adult disabled from childhood may be entitled to receive a monthly Supplemental Security Income (SSI) check from the Social Security Administration. This monthly income might range from several hundred to several thousand dollars each month. Without planning, an individual can completely lose eligibility for benefits even with an inheritance as small as $2,000.
Selecting the right trustee who will care, manage and conserve the assets for the beneficiary may be the hardest task. The trustee needs to be versed in estate planning law and the rules governing SSI payments, while communicating with the beneficiary and the people coordinating the efforts of doctors, financial advisors, therapists and government agencies.
A special needs trust can manage the assets of the heir while preserving the child's eligibility for government benefits. As long as the assets are controlled by an independent trustee, the money isn't considered to be owned by the special needs individual. And trust distributions are discretionary — the trust beneficiary cannot spend the money at will.
Although trusts are required to pay income taxes, they may take a tax deduction for all income distributed to or for a beneficiary, as well as professional fees and expenses. There's no deduction for income earned but not distributed by the trust.
It may be advantageous for taxes to remove trust assets from the beneficiary's estate, reducing the estate tax at a parent's death. The funding of the trust may be considered a completed gift to the remainder beneficiaries — those who are entitled to support from a trust — and not part of the primary beneficiary's estate for estate tax purposes.
Parents of special needs children also should create detailed documents for finances and health care: Power of attorney and health care proxies work wonders when the adult children are incapable of making decisions for themselves. Letters of guidance give detailed instructions for the special needs child: diagnosis, treatment history and medications. Food preferences can be laid out, and favorite pastimes — little things like what breakfast food makes them happy or which one makes them angry.
When caring for a person with a disability, considering estate planning and tending to tax details can help you avoid difficulties in the future.