March is Developmental Disabilities Awareness Month, and in honor of that observance, we are going to discuss the most common mistakes that you should avoid when planning for a loved one with special needs. There are many misconceptions that can cost families time and money. The following is a list of the most common mistakes and what can be done to avoid them.
- Disinheriting the special needs beneficiary. Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. Those with special needs beneficiaries may have been advised to disinherit that person to protect their public benefits. But these benefits rarely provide more than basic needs. And this solution does not allow you to help your special needs beneficiaries after you become incapacitated or are gone. When a loved one requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others should consider establishing a Special Needs Trust.
- Procrastinating. Because none of us knows when we may die or become incapacitated, it is important that you plan for a beneficiary with special needs early, just as you should for other dependents such as minor children. However, unlike most other beneficiaries, special needs beneficiaries may never be able to compensate for a failure to plan. Minor beneficiaries without special needs can obtain more resources as they reach adulthood and can work to meet essential needs, but special needs beneficiaries may never have that ability.
- Failing to coordinate a planning team effort. It is critical that advisors assisting with special needs planning include in the planning team: an attorney who is experienced in this planning area; a life insurance agent who can ensure that there will be enough money to maintain vital benefits; a CPA who can advise on the Special Needs Trust’s tax return; an investment advisor who can help ensure that the trust fund’s resources will last for the special needs beneficiary’s lifetime; and any other key advisors that may support the goals of the trust going forward.
- Creating a generic special needs trust that doesn’t fit. Some special needs trusts are unnecessarily inflexible. Many trusts are not customized to the particular beneficiary’s needs, causing the beneficiary to not receive the benefits that the parents or others provided when they were alive.
Another frequent mistake occurs when the Special Needs Trust includes a pay-back provision rather than allowing the remainder of the trust to go to others upon the death of the special needs beneficiary. While these pay-back provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your clients hundreds of thousands of dollars. - Failing to properly fund and maintain the plan. When planning for a person with special needs, it is absolutely critical that there are sufficient assets available for the them throughout their lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes permanent life insurance is the perfect vehicle for this purpose, particularly for young and healthy clients while insurance rates are low.
- Choosing the wrong trustee. Typically, the person who establishes the trust can manage it while alive and well. But they should ensure that they provide instructions on a successor trustee in the event they are unable to hold that responsibility. They may choose a team of advisors and/or a professional trustee, but whoever they choose, it is crucial that the trustee is financially savvy, well-organized and of course, ethical.
- Failing to invite contributions from others to the trust. A key benefit of creating a Special Needs Trust is that the beneficiary’s extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.
Planning for special needs beneficiaries requires particular care and the participation of all of the clients’ wealth planning advisors. A properly drafted and funded Special Needs Trust can ensure that special needs beneficiaries have sufficient assets to care for them, in a manner intended by their loved ones, throughout their lifetime.
