Estate planning for parents of disabled children requires more care and consideration than a simple Will. The financial and personal well being of a disabled child can only be property protected by utilizing special needs planning. This article will focus on the use of special needs trusts for disabled children and their parents.
Economically, a number of government programs exist to support disabled individuals. These programs include SSI, SSDI, Medicare and Medicaid. To be eligible for some of these programs, the disabled individual can only earn a nominal amount of income and own very limited resources. The receipt of cash or other liquid resources, either through a Will or as a beneficiary of an IRA, life insurance policy or annuity, will frequently disqualify a disabled individual from receiving the above mentioned government benefits. If the individual has substantial physical needs, the loss of Medicaid alone can be devastating.

Three estate planning methods exist for parents of disabled children. Only one of them is correct. The first method is to leave a portion of your estate behind to a disabled child outright. However, this method will almost certainly disqualify the disabled child from government assistance. In this scenario, your bequest well merely replace government dollars until it is exhausted, without providing any real benefit to the disabled child.

The second method is to leave the estate to the disabled child's siblings. This method will not result in the disqualification from government benefits. However, there is no assurance that the siblings will utilize a portion of the estate for the benefit of the disabled individual. Even if the surviving siblings harbor good intentions as to the handling of these funds, such funds can still come under attack if that sibling becomes divorced or the subject of personal creditors.

The third -- and proper -- method is to establish a special needs trust. This trust will become the owner of the bequest a parent would have left to a disabled child rather than the child personally. If property drafted, it will allow for the continuation of government benefits, reserving the trust fund for purposes that will enhance the enjoyment and well being of the disabled beneficiary. To be properly drafted, it must be a discretionary, rather than a support trust. A support trust is simple language which states that the trust funds can be used for health, welfare, and support. This language will be successfully attacked by the appropriate government authority to call for the conversion of the money to replace government benefits. A discretionary trust, on the other hand, is effective because it meets a number of criteria, including its statement that the trust can only be used for purposes not covered by government entitlements and that the discretion to utilize the trust funds lies solely with the trustee, not the beneficiary.

This trust can be established through a Will (testamentary trust) or as a separate document (stand alone trust). Both trusts will effectively address the use of a parent's funds after death. However, the stand-alone trust has an additional advantage in that it will allow for funding during the life of the parent. This advantage can be utilized, for example, if a grandparent or other relative wishes to leave a bequest to the disabled individual.

To maximize the effectiveness of a trust, a parent should carefully review the title of their assets. Although spouses are named as beneficiaries under most IRA's, annuities, and life insurance policies, the children become the beneficiaries, in equal share, if the spouse predeceases the owner of these assets. It is imperative to retitle such assets so that the trust can receive the disabled child's portion.

In conclusion, special need planning exists which can maximize the bequest of a parent to child and enhance a disabled child's quality of life. Creating a properly drafted special needs trust and cautiously titling of non-probate assets can effectively accomplish these goals.