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Inheritance
When Your Best Intentions Can Damage Your Special Needs Child
By Gregory P. Hawkins, JD

If you are thinking of leaving a direct inheritance to your special needs child, consider the price tag for this catastrophic estate planning decision. (Or you may be  like 95% of parents who fail to plan and simply leave an inheritance by default.) The consequences could prove devastating for your child.

And it is so easy to make the correct decision.

For a moment, imagine that your financial estate consists of nothing more than a small life insurance policy you bought when your bank sent you one of its ubiquitous mailers. For the sake of argument, let’s say $10,000. According to the advertising slick, “Peace of Mind for only Pennies a Day.”

Without doubt, this represents a dramatically undersized estate when compared to the average family’s net worth, especially if they own a home. However, for the purposes of this example we want to drive the point home. We will extrapolate upward later.

The two primary government benefits available to citizens with disabilities are SSI (Supplemental Security Income) and Medicaid. Of the two, Medicaid is the most important since medical expenses can be astronomical. The maximum, monthly SSI payment, on the other hand, is only $623 dollars per month in 2007 for a non-blind single person, scarcely enough to provide for a bare subsistence lifestyle.

First and foremost, it is critical to understand that SSI, while miniscule by most standards as a living allowance, is also the passport or gateway to other benefits. In Utah, as with most states, if your child qualifies for SSI he qualifies for Medicaid. Obviously, the reverse is true as well; no SSI, no Medicaid.

Here is what will transpire upon your death. When the $10,000 insurance policy disburses, your child’s SSI benefits (along with Medicaid) stop immediately because your child’s countable assets exceed the $2000 limit imposed by SSI. However, this is not irreversible. Once your child has spent $8,000 of the inheritance, then counselors or relatives can make application for the resumption of SSI benefits.

In truth and on an emotional level, a lump sum inheritance invokes a certain indulgent appeal for many parents. For example, your child with a disability could purchase a couple of pairs of good athletic shoes, a high-definition TV and a DVD player, as well as the X-Box he has wanted for so long, a decent winter coat, a half dozen dinners out with friends and perhaps a used car (if he can drive).

You have the satisfaction of knowing that after your passing your child will experience an exceptionally good time and accumulate some great stuff along the way. $10,000 buys a lot of fun, not necessarily a bad thing.

It should, obviously, be acknowledged that unless your child with a disability possesses exceptional budgeting skills the money will disappear quickly. In fact, the more quickly he dumps the money the better as this represents the only positive aspect of this scenario. He might even be able to blow through his entire inheritance in a couple of months and quickly return to the comforting security of government benefits.

On the debit side, after SSI and Medicaid benefits stop your child must pay for rent, food, incidentals, and all medical expenses. Hopefully, he will pay in cash. Those expenses he fails to pay while the money lasts will come due when it is gone.

You must also keep in mind that many other aspects of his life may be thrown into disarray as essential elements of his security network will begin to unravel. Will he continue to qualify for the schooling or training workshops he currently attends? Will counselors, therapists and social workers be forced to withhold their help for a period of time unless they can work out a cash payment plan with your child? (Certainly an interesting, albeit awkward turn of events to take into account.)

Government benefits are easy and simple to stop ─ like flipping a light switch ─ but not always quick and effortless to put into motion again. After the inheritance is gone, how much time will elapse without any government safety net?

Additionally, the dark side of a direct inheritance to your child with a disability grows exponentially if we substitute a more realistic inheritance in place of the $10,000 example. How long would your child flounder without government benefits if you leave a $50,000 or $100,000 inheritance? What sort of friends and fair weather mentors will he attract? Contemplate the life altering decisions he will make? How will he feel after the spending spree has ended and reality returns?

Now, consider a second, more practical, scenario.

Suppose you established a Special Needs Trust that you created long before your death to protect your child. (This is not some lawyer’s trick; it is provided for by federal and state statute.) You name the Trust as the beneficiary of your insurance policy, rather than having the money paid directly to your child. The Trustee (a friend or family member of your choice) would disburse the funds as you direct in the trust. Because the trust owns the money ─ not your child ─ the law does not recognize the $10,000 as your child’s asset. SSI and Medicaid benefits continue.

Since the TV, DVD player, as well as the X-Box are household furnishings, SSI does not recognize them as assets. The Special Needs Trust (according to your written instructions) could provide these items at any time. The trust could even purchase a car or a home for your child without diminishing government benefits. (To see an extremely long list of items and services the trust could purchase for your child without curtailing SSI, Medicaid or other benefits, go to our website.)

Of course, some products and services purchased by the trust will diminish the monthly SSI payment. Still, a carefully worded trust would instruct the Trustee to disburse trust money judiciously so as to protect and maximize your child’s government benefits. Additionally, even trust disbursements that SSI considers countable as your child’s assets are generally valued by SSI rules at a dramatically reduced rate. [For more complete information of earned, unearned and in-kind income, click here.]

As indicated earlier, a $10,000 inheritance funded through an insurance policy is improbable because it is such a small amount of money. At the same time, a Special Needs Trust (SNT) funded with $10,000 could provide your child with many of life’s fringe benefits for a couple of years, or more. Also, as noted above, such a policy can be purchased for pennies a day.

A Special Needs Trust funded with $50,000 could provide your child with a more fulfilling lifestyle for up to ten years after your death. An SNT funded with $100,000 could last for up to two decades.

The concept of a Special Needs Trust is not mythical, mystical or even inherently complex. It is a well establish estate planning tool, recognized and endorsed by law, and it can be setup in a few hours. (For information about the complete costs of establishing an SNT, see COSTS & FEES.)

The Special Needs Trust is, by far, the most compelling legal instrument available to provide you with the peace of mind you seek and to provide your child with a disability with the kind of lifestyle you provide as living parents. Most important, it has few of the inescapable drawbacks of a lump sum inheritance.

© 2009 Gregory P. Hawkins