Would it surprise you if your professional advisor recommended “special needs” planning when you don’t have any special needs children or grandchildren? It’s important to think about what might happen to your loved ones after you’re gone, that would impact your estate plan. We try to plan for unforeseen financial circumstances, and thus build into our plans some creditor protections for our beneficiaries whenever possible. The same type of preventive planning can be done to protect loved ones in a tragedy that leads to physical and/or mental disability. Consider what happened with the estate plan of John and Elizabeth.

John and Elizabeth had three children: John Jr., Michelle, and Jerry. Their estate planning attorney prepared a living trust that passed their estate in equal shares to the children in trust. At John and Elizabeth's death, the estate, which was estimated at $2,100,000 after taxes and expenses, would be divided among the children – $700,000 to each of their trusts, which they were free to spend as needed.

The trusts for the children provide that if John Jr., Michelle, or Jerry passes away, anything that’s left in their trust will be distributed to their own children. All three of John and Elizabeth's children had children of their own, and everyone in the extended family was in good health.

One day John, Elizabeth, and Jerry were traveling together and were involved in a terrible automobile accident. John and Elizabeth were killed, and Jerry was injured so badly that he was no longer able to care for himself.

The person named as his guardian immediately sought help for Jerry's medical expenses from Medicaid or other means-based government programs. They were shocked to learn that Jerry’s entire inheritance of $700,000 would have to be spent on medical expenses before Medicaid would assist him. As an alternative, the guardian learned that the assets could be placed in a special kind of trust to be used for Jerry's benefit. But at Jerry's death, that trust must reimburse Medicaid for what was spent for care during his life. The result in either case is that little or nothing will be left for Jerry’s children.

This result could have been avoided by creating a special needs trust. A special needs trust is specially designed to hold the inheritance of a beneficiary, and to be used for needs above and beyond those covered by government programs. These trusts contain instructions that allow the Trustee to meet the needs of the beneficiary, but prohibit the Trustee from providing for those needs if already covered by Medicaid or other programs. It also prohibits the Trustee from using the assets to reimburse any government program after the beneficiary’s death.

John and Elizabeth could have included instructions in their living trust that if one of their children were disabled, their share of the inheritance would pass to a special needs trust which could be used at the discretion of the Trustee. The result in Jerry’s case would be that his needs would be met during his lifetime, and anything left over at the time of Jerry's death could be passed on to his children.

If you have questions,  click here to have our office call to set up a time to discuss this with you.

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