Estate Planning For Disabled Family Members

Physical or mental disability may leave a child unable to handle money. Where such a child is a public or private assistance recipient, eligibility may be lost if the child inherits assets or even if a carelessly drafted trust is established for such child. Lost benefits may include Supplemental Security Income (SSI) and Medicaid. Just as important, the unintended loss of benefits also means the loss of caseworkers, some housing options, and an entire network that may have been supporting the adult child for years.

Two main options are available. One is total disinheritance of the child, perhaps with promises from other children that they will look out for their disabled brother or sister.

The second is to create a Special Needs Trust designed to hold assets for the benefit of the child, but to restrict use of the funds so that public or private assistance eligibility remains undisturbed.

Lets go through each option and their consequences.

When a child is totally disinherited from the estate the child will have no additional resources from the estate and therefore will not otherwise become ineligible for public or private assistance. Here the plan could be to give the child's share of the estate to a trusted family member or friend. The trusted person would then take care of the disabled child's extra needs with that portion of the inheritance. Extra needs are also called "luxury items," however, the state of Ohio's definition of luxury items is not what you and I would call them. Examples of these items are cigarettes, birthday presents, airline or bus tickets to visit relatives, furniture, a small stereo, trips to movies or beauty parlors, and sundry personal items that are not otherwise provided for by such assistance. These are certainly items that can make life more enjoyable but are hardly extravagant. The problem with this plan is that it is a "moral" obligation and not a legal one. Circumstances can change which could make this plan fail. The trusted person may not be as trustworthy as believed, he or she could get into their own pressing financial circumstances, they could marry someone who may exercise influence over how to spend the money that may not be in the best interests of the special needs child, and they could themselves become incapacitated or even die.

The second option is to create a special needs trust as part of a living trust. The state does allow you to create a testamentary (through a will) trust for such child's benefit. Such a trust must go through probate, is limited to approximately $50,000 in total value and half of the principal and income remaining in the trust after the child passes away must go directly to the state. The special needs trust in a living trust avoids probate, is not limited by any statutory amount and may pass the remaining income and principal to other beneficiaries after the child passes away. This trust sets aside the disabled child's portion of the inheritance so that he or she would not have any direct right to receive the income or principal. Instead, the trustee would hold legal title to that inheritance in trust. The trustee would use the income and principal to pay for any luxury items that were needed for that child's benefit. After the child passes away, his or her share would then pass to other named beneficiaries. Great care must be exercised to insure that the language is drafted so as not to disqualify that child from their assistance from the government or private institution. The trust must not be discretionary, that is, it must not allow the trustee to spend the money for the general support or welfare of the child. Such discretionary trusts have been held by Ohio courts as reachable by the government, thereby forcing the trustee to use these funds to pay for what the assistance was previously paying for. Instead the trust language should say that the money can only be used by the trustee to pay for "luxury items" that the assistance would not otherwise pay for. It should also be noted that the laws in this area are in a state of transition. Although such language should work today, there is no guarantee that the laws will not change in the future. It is unusual for laws to be applied retroactively (that is reaching back to things that were done in the past), however, remember that the 1993 income tax increase was made retroactive when it was passed.

Whatever you do, take care to use an attorney who understands these laws and how to apply them to your needs.

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