—PROVIDING FOR THE SPECIAL NEEDS HEIR—THIRD PARTY BEQUESTS, SUPPLEMENTAL NEEDS TRUSTS, AND ILITS

What are the specific reasons that parents of a special needs child must have a will?Finally, the can permit specific bequests or transfers in trust suitable for a special needs beneficiary of the estate.
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What are the specific reasons that parents of a special needs child must have a will?Finally, the can permit specific bequests or transfers in trust suitable for a special needs beneficiary of the estate.
An individual without a will loses control over their estate planning. In the case of a parent of a child
with special needs, the appointment of a guardian of the person and the property is an important function of the will. However, that parents can not name a binding guardian for an adult child. If the parents have been named guardian of the child, they could appoint a successor guardian. The will permits the parents to name the personal representative of the estate and permits the distribution of probate assets according to the terms of the will.
What are the items of property not passed by the will where mistakes could be made even if a valid will
is created?
A will only provide for the distribution of probate property or property that has been designated payable to the executor of the will. Nonprobate property is transferred either by beneficiary designation or operation of law. Joint tenancy with rights of survivorship is transferred directly to the survivor when a joint tenant dies. A retirement plan is payable to the named beneficiary in the plan document. Life insurance is payable to a designated beneficiary. The standard beneficiary designations of "first to the surviving spouse and then to the children" of the retirement plan owner or policyowner in the case of life insurance, will yield potentially bad results if there is a special needs child. The same care should be taken to provide for the special needs child through a supplemental needs trust if the transfer comes
from nonprobate property.
Discuss the impact of the typical transfer methods for children when one or more children have special
needs.
The standard transfer mechanisms for the children will yield bad results if a child has special needs and has concerns with respect to competency and government benefits, such as Medicaid or SSI. Transfers directly to such child will often result in immediate reimbursement to the state for government benefits already received and the remaining assets could disqualify the beneficiary from Medicaid until the assets are dissipated for health or long-term care expenses. However, there are other reasons to avoid these direct transfers. The special needs beneficiary may not have the capacity to receive and manage the assets. In addition, assets held by a beneficiary who lacks the capacity to write a will could end up in
intestate distribution at the time the beneficiary dies.
Discuss the advantages of leaving bequests in trust for a special needs child.
A trust is an especially useful tool for beneficiaries with special needs. The trust can be designed to avoid the problem of a reduction of government benefits. The trust assets can be held for the special needs beneficiary to better manage and conserve the assets over the beneficiary's lifetime. The trust will avoid the living and death time probate for the special needs beneficiary and the ultimate disposition of the assets can be controlled by the parents who leave their assets in trust.
Identify the types of trusts that could be created by the parents to transfer wealth to a special needs
child.
There are multiple types of trust arrangements through which a parent could leave assets. A trust could provide for mandatory income distributions and discretionary distributions for the support of the beneficiary. The trust could provide only for discretionary support of the beneficiary. This type of trust is also known as a third-party supplemental needs trust or is called a flexible special needs trust in the Russell textbook. Finally, there is a non-flexible supplemental needs trust that specifically cannot provide for items of support of the beneficiary.
Why is the self-settled special needs trust (SNT) not the most efficient vehicle for leaving assets to a special needs child?
The self-settled special needs trust (SNT) generally should not be used as the vehicle to receive gifts
or bequests from the special needs beneficiary's family members. You will recall from Assignment 8
that the SNT had a mandatory provision to repay the state for any Medicaid expenditures made on
the behalf of the SNT's beneficiary. For funds coming from a family member, the payback requirement is not necessary if a third-party supplemental needs trust is created. Hence, the funds can be used for the same purposes during lifetime as the payback SNT, but all the remainder of the trust funds can be distributed to other family members at the death of the special needs beneficiary.
Describe the terminology and purpose of a third party supplemental needs trust?
The third-party supplemental needs trust is designed to provide for discretionary distributions to the special needs beneficiary without reducing or replacing benefits that might otherwise be available from government programs, such as Medicaid. The purpose of this trust should be to expressly supplement but not supplant government benefits. All distribution terminology to be followed by the trustee should
provide the trustee with complete discretion over distributions. There should be no terminology for the mandatory support of the beneficiary. As such, the trust can provide items not provided by government programs to provide a high quality of life for the special needs beneficiary while potentially providing support for a beneficiary if government benefits are insufficient. Similar to our discussion in Assignment 8 with respect to self-settled SNTs, these third-party supplemental needs trust can provide for such items as vacations, housekeeping services, specialized training, lawn care, laundry services, electronics for the household, telephone bills and household furnishings.
What is a discretionary support trust?
A discretionary support trust is a trust that is designed to be a third-party supplemental needs trust. The support terminology is discretionary and in many states this would not be treated as an available asset for the support of the special needs beneficiary. The language used in the trust would create an express purpose to supplement but not supplant government benefits. However, the primary concern of the parent creating the third-party discretionary support trust would be to ensure that the child is cared for. It is possible under current law to draft this trust without reducing the child's eligibility for government
benefit programs.
What are the reasons for using a corporate trustee in the case of a special needs beneficiary?
A corporate trustee can be relied on to manage and invest trust property effectively. They are experienced in handling trust administration. This is particularly true in the case of specialized special needs trust. The corporate trustee provides for continuity of life since it is not an individual. In many instances, a corporate fiduciary will be required, specifically with a special needs trust. In this instance, the experience of dealing with the Social Security Administration and state Medicaid authorities will be essential.
What are the advantages of using an individual co-trustee in a trust for a special needs beneficiary?
An individual co-trustee can provide for the advantages of having the experience of a corporate co-trustee with the personalized influence of the individual co-trustee. The individual co-trustee can act as an advocate for the special-needs beneficiary of a third-party supplemental needs trust. If there is a co-trustee, this can potentially solve the problem of a conflict of interest since the trustee with the conflict can be prohibited from making a decision with respect to the conflict.
What is the unique purpose for a trust protector in a trust for a special needs individual?A trust protector is a third-party given the power to amend or terminate a trust. The trust protector has a uniquely important role in the case of a supplemental needs trust. The trust protector can terminate or amend the trust if changes in law might make the trust of available for Medicaid purposes. The trust protector can make a decision in the best interest of the special needs beneficiary.Identify the estate-planning advantages of an ILIT.The ILIT provides the following advantages for estate planning purposes: • disposition of the trust assets according to the grantor's terms • efficient use of the grantor's gift tax annual exclusion 10.6 • efficient use of the grantor's GST exemption • avoidance of estate taxation of the insurance proceeds • avoidance of probate • liquidity for the grantor's estateDiscuss the adaptation of the traditional ILIT to a supplemental needs trust for a special needs beneficiary.The traditional ILIT will have to be changed in several regards with respect to receiving life insurance benefits for a special needs beneficiary. First, the ILIT should not be designed to provide the so-called Crummey powers to the special needs beneficiary. The funds available through such withdrawal powers could be treated as an asset and income for SSI or Medicaid purposes. Second, the trust terminology for the potential distributions to the special needs beneficiary should be changed to the discretionary nonsupport language discussed above in question 7. Finally, the typical co-mingled trust language for multiple beneficiaries of the ILIT should be avoided and a separate fund with the special discretionary language should be created solely for the special needs beneficiary.Discuss the potential benefits to other family heirs from an ILIT designed as a supplemental needs trust for special needs beneficiary.An ILIT designed as a third-party supplemental needs trust for special needs beneficiary is much more efficient for the life insurance on the lives of the parents, grandparents, or other family members than the self-settled special needs trust (SNT). While the life insurance used in the third-party supplemental needs ILIT can provide for the quality of life benefits for the special needs beneficiary, it could provide a separate fund for the other family heirs of the insured(s). At the very least, the remainder of the ILIT's funds at the death of the special needs beneficiary can be distributed to the remainder beneficiaries from the family without diminution for the Medicaid benefits received by the special needs beneficiary. Remember, the payback SNT would require reimbursement from the trust for Medicaid expenditures received by the special needs beneficiary during his or her lifetime.Discuss the why the disinheritance of the special needs heir is not generally a recommended planning technique.Disinheritance of the special needs child is sometimes recommended as a planning technique. If the special needs child is not the recipient of any funds, the child will have a much greater chance of receiving government benefits, such as SSI or Medicaid. However, this plan normally incorporates an understanding that the siblings of the special needs child will make funds available to provide for quality of life for the special needs sibling. This plan has a few flaws. How can we ensure that the siblings will actually live up to this understanding? What if the siblings have creditor or long-term care issues of their own? The funds obviously could be subject to many risks if not held in trust for the special needs heir.