In this issue of The Wealth Advisor, we will focus on an area
that will likely apply to you or someone close to you: planning for a
loved one with special needs. We will look at the increasing need for
this planning; the decrease in government benefits; the concerns
families have about providing for their loved ones; whether it is worth
protecting government benefits; and planning tips to help you provide
for and protect your loved one for as long as he or she lives.
The Increasing Need for Special Needs Care and Planning
Chances are there is or will be someone in your family (child,
grandchild, nephew, niece, parent, grandparent) who will need long-term
help managing personal care and/or finances. A quick look at the
following statistics confirms that the need for special needs care and
planning is increasing:
- In 1992, there were 15,580 children ages 6-22 who were diagnosed as
having what is now called an Autism spectrum disorder. In 2006, the
number was 224,594.
- In 2006, there were an estimated 24.9 million adults in the United States with Serious Psychological Distress.1
- An estimated 4.4 % of U.S. adults may have some form of bipolar disorder during some point in their lifetime. 2
- In
2006, an estimated 22.6 million people in the U.S. (9.2% of the
population age 12 or older) were substance dependent or abusive in the
previous year.3
Because many of the conditions causing a need for special care do not
decrease life expectancy, families are seeking answers on how to provide
the best quality of life for their loved ones for the rest of their
lives . . . which, for a young child, could be 70 years or longer.
Fewer Programs Are Available
At the same time that the need for support services is increasing,
government and non-government programs are being reduced and even
eliminated due to the strain on state and local budgets and pressures to
reduce deficit spending at the federal level. Once a program benefit is
lost, for whatever reason, it may be difficult if not impossible to get
it back.
Many families with special loved ones are losing faith that these
programs will be there to provide the needed benefits in the future.
They are wisely (and often fearfully) looking at alternatives to provide
those services. Common concerns are:
- Who will care for my loved one when I am gone?
- Who will be my loved one's advocate?
- Where will my loved one live?
- How much independence can my loved one maintain?
- Will the money I provide last for my loved one's lifetime?
Preserving Government Benefits/Special Needs Planning Today
Are
government benefits for a special needs person worth preserving? For
families of modest or limited means, the answer is almost always, "Yes."
However, for more affluent families, the answer may be, "Maybe not."
In the past, many planners focused exclusively on preserving public
benefits at all costs. Today, special needs planning is not necessarily
"poverty planning." The proper focus today is how to provide the best
quality of life throughout the person's lifetime. It may be better to
privatize some special needs care instead of spending thousands to
protect a benefit that has a low probability of being available in the
future.
Careful planning is necessary to craft a plan that will supplement
government benefits that are worth preserving, is flexible enough to
adjust to changes in future benefits, will preserve and expand assets,
will make sure this person receives proper care, and may even save
taxes.
It Takes a Team
For a special
needs trust, the proper funding, implementation and periodic review are
especially critical because it may have to last a lifetime and often
cannot be replaced. Once the plan is in place, it will be need to be
managed. Who should do that? The ideal trustee would:
- use discretion, acting in the best interest of the disabled beneficiary;
- understand public benefits and keep up with changes in the law;
- wisely invest and conform to all statutory fiduciary requirements;
- understand taxes;
- keep perfect books;
- provide advocacy and prevent abuse; and
- be immortal.
Since
no one person can meet all of these requirements, often the most
effective solution is to divide the responsibilities into areas and have
a team of professionals work together. For example:
- A
Corporate Fiduciary Trustee (bank or trust company) keeps perfect books;
carries insurance, is bondable or has deep pockets; is immortal.
- A
Care Manager uses discretion and acts in the best interest of the
beneficiary; understands public benefits; provides advocacy and prevents
abuse.
- A Financial Advisor invests wisely; conforms to all statutory fiduciary requirements; understands taxes.
- A
lawyer skilled in special needs matters keeps up with the ever-changing
laws and regulations and provides wise counsel to the family and the
other team members.
Often a professional trustee will
manage the funds, make distributions, prepare tax returns and keep the
records, but will be directed by a Trust Advisory Committee that makes
distributions, can amend the trust or replace the trustee. A care
manager can be on this committee or be appointed by the committee.
Another
alternative is to have a trustee manage the funds but be directed by a
care manager who interacts with the beneficiary. A trust protector or
advisor would oversee the trustee and care manager from a distance and
would be able to replace either for any reason.
Planning Tip:
Many parents think a sibling would be the best trustee, but this is
rarely a good idea. Most individuals are just not prepared to handle the
responsibilities. A professional trustee likely will, in the long run,
be less expensive than the mistakes that are often made by a
well-meaning but inexperienced family member. Also, some siblings may be
torn between using the trust assets to provide for the beneficiary and
preserving the assets, especially if they will inherit the assets after
the beneficiary dies. It is usually better to have a professional as
trustee, and have the family member be on the Trust Advisory Committee
or to be the trust protector.
Planning Tip: The
role of the care manager is critical. In most families, one person has
been a fierce advocate, actively seeking benefits and supervising the
special needs person's care and progress. The care manager will assume
that role and will become the beneficiary's advocate, seeking and
evaluating benefits and programs, supervising the person's care and
preventing abuse. Selecting a care manager while the current advocate is
living will give families peace of mind that their loved one will have
the quality of life they so strongly desire.
Managing the Trust Assets
Careful
investment of the trust assets is critical, since loss of these assets
could be catastrophic for the beneficiary. The assets will need to earn
or grow enough to provide for or supplement the beneficiary's care.
Trust income can be distributed in such a way that it is taxable to the
beneficiary (because the beneficiary will typically be in a much lower
tax bracket than the trust itself), but without unintentionally
jeopardizing any public benefits the beneficiary may be receiving. This
can often be accomplished by having the trustee make direct payments to
the providers for care and/or supplemental benefits.
Planning Tip:
Insurance on the life of a parent or grandparent is often used to fund
these trusts. Using a separate, stand alone trust (instead of a parent's
revocable living trust) will also allow other family members to make
gifts to support the beneficiary.
Planning Tip:
Tax planning combined with special needs planning can present some
unique opportunities. For example, using qualified plans to fund these
trusts can offer tax advantages. Charitable trusts can also be used to
benefit both the beneficiary and an organization. Families are often
grateful to organizations that have provided assistance and benefits to
the family member and to them, and often want to help make sure these
organizations can continue to provide services to not only their loved
one but to other families in the future.
Planning Tip:
Families with affluent means will be able to provide more opportunities
for their special needs beneficiary. For example, purchasing a home in a
residential community will guarantee your loved one will always have a
familiar, safe home.
Conclusion
If you
or someone close to you has a loved one with special needs, we can help
with all phases of the planning and implementation. Contact our office
for a consultation.
AN UPDATE ON THE ESTATE TAX: With each day
that passes we are less likely to see any Congressional action this year
on the estate tax; thus, it is becoming more likely the law will revert
to a $1 million federal estate tax exemption in 2011. Your estate plan
may need some additions or changes. If you have questions, please
contact our office.
1 http://www.oas.samhsa.gov/NSDUH/2k6NSDUH/2k6results.cfm
2 http://www.pendulum.org/bpnews/archive/001884.html
3 Based on criteria specified in the Diagnostic and Statistical Manual of Mental Disorders, 4th edition (DSM-IV).
Test Your Knowledge with This True or False Quiz
1. Government benefits for a special needs person are always worth preserving. True or False
2. The need for special needs care and planning is decreasing. True or False
3. Government and non-government programs are being increased to keep up with the need for support services. True or False
4. Siblings are always the best choice to be the trustee for a special needs trust. True or False
5. One person can usually handle all of the trustee's responsibilities for a special needs trust. True or False
6. If a government program is cut, it will usually be reinstated in the following year's budget. True or False
7. After a special needs trust has been set up, it is not necessary to review it again. True or False
8. The choice of a care manager is really not that important. True or False
9. There is no reason to select and implement a care manager while the current advocate is still living. True or False
10. The trustee should always pay distributions directly to the beneficiary. True or False
Answers: All of the above are false.
To
comply with the U.S. Treasury regulations, we must inform you that (i)
any U.S. federal tax advice contained in this newsletter was not
intended or written to be used, and cannot be used, by any person for
the purpose of avoiding U.S. federal tax penalties that may be imposed
on such person and (ii) each taxpayer should seek advice from their tax
advisor based on the taxpayer's particular circumstances.