Special Needs Planning and Your Estate - Meeting Their Needs When You're Gone
by Don Drake, Connelly Law Offices, Ltd.
"Third-party special needs trusts, sometimes called supplemental needs trusts, are estate planning tools for parents of children with mental/physical disabilities and the elderly," said professional fiduciary and certified elder law Attorney RJ Connelly III. "This type of trust will receive assets from you or another benefactor expressly for that person with a disability with multiple goals in mind."
The goals Attorney RJ Connelly speaks of include:
Leaving funds for your child's or elderly family member's benefit without causing the loss of public benefits.
Ensuring these funds are professionally managed.
Ensuring other family members are not overburdened caring for a disabled sibling or older adult and that the task falls evenly among siblings or family members.
Fair asset distribution of your estate among your disabled child or older adults and your other children.
Ensuring there is enough money to meet the needs of your disabled child or adult.
"Parents often leave additional assets to siblings and nothing to the disabled child or older adult in the hope that the sibling will adequately manage the money while retaining government benefits and providing overall care and decision making for the special needs person," stated Attorney RJ Connelly. "Unfortunately, this action is not the wisest of approaches for several reasons."
"Government programs are often more supplemental aid to a disabled person than a complete solution," Attorney RJ Connelly continued. "Public benefits programs are often inadequate without monies set up correctly in a trust. Considering this, what is working well today may change tomorrow as public benefits programs and individual circumstances change and, in some cases, could be discontinued entirely. Finally, relying on other children to care for the unique needs of family members puts an undue burden on them, which could strain family relations. If this occurs, resentments can build, and sometimes decision-making is not in the best interest of the special needs family member."
The SECURE Act for Special Needs Planning
"The Setting Every Community Up for Retirement Enhancement (SECURE) Act became effective on January 1, 2020," said Attorney RJ Connelly. "This Act affects special needs planning for third-party supplemental and first-party special needs trusts. The SECURE Act does not change the goal or general planning method related to children or adults with a disability and planning with retirement assets. The preferred method is a properly drafted third-party special needs trust with a qualified designated beneficiary, specifically an accumulation trust. This trust provides asset management that retains public benefits and provides a lifetime stretch of a traditional retirement account or IRA benefits for the trust beneficiary."
"The unwelcome news about the SECURE Act is the new ten-year payout of retirement assets after the account owner's death, accelerating income tax taxation on the retirement assets," stated Attorney RJ Connelly. "Only a qualified eligible designated beneficiary, commonly called an EBD, can take advantage of a longer than ten-year payout rule. Therefore, unless an exception applies, traditional accounts or IRAs will be paid out within ten years to the designated beneficiary or within five years if there is no designated beneficiary."
Who Are Eligible Designated Beneficiaries?
The EDB Attorney RJ Connelly referred to is a new class of beneficiaries and is an exception category for individuals still permitted to use a lifetime payout. Qualifying EDBs under SECURE are:
A surviving spouse.
Minor children of the participant.
Disabled beneficiaries.
Chronically ill individuals.
A beneficiary less than ten years younger than the participant.
"These exceptions permit the lifetime payout, resulting in less income tax realized by the distributions of retirement assets, as long as the beneficiary's life expectancy is no longer than the default ten-year rule under SECURE," said Attorney RJ Connelly.
However, there are still unanswered questions about SECURE. For instance:
Can remainder beneficiaries of an adequately drafted third-party special needs trust be disregarded when determining the applicable distribution period for an EDB during the EDBs lifetime?
Can a trust for minors as a beneficiary continue without losing EDB status and requiring the ten-year payout?
Is it permissible to certify disability by eligibility for Supplemental Security Income (SSI), Social Security Disability Benefits (SSDI), long-term care Medicaid, or a separate disability certification process that exists for ABLE accounts?
Use an Experienced Professional
"Because of these questions and a lack of clarity around EDBs, I strongly encourage anyone developing a special needs trust to consult with an experienced elder law attorney to avoid any problems with the trust," said Attorney RJ Connelly. "Our special needs trusts professionals can help you map out benefits that can include SSDI, Medicare, Medicaid, food stamps, and more, taking into account the needs of your particular child and the services they may require throughout their life and the associated costs that may occur."
"We will also help you identify a circle of support available to your child and help to identify the best choice as trustee for a special needs trust, which is a critical designation," stated Attorney RJ Connelly. "Our office also has strong ties with therapists, care managers, and other service providers in southern New England that can address upcoming issues that may be unknown to you. Taking these steps towards long-term special needs planning is the best way to ensure your loved one with disabilities can remain socially and financially secure after you're gone."
