Planning for Children with Special Needs

I frequently meet with couples that have a child with "special needs," such as Down's Syndrome, autism, OCD, and other common condition. The parents have often been advised by friends - or even professional advisers -- to disinherit the special needs child on the theory that the child would lose their governmental benefits (e.g. SSI, Medicaid) if they were inherit a share of their parents' estate. Instead, the parents plan to leave all the assets to the other children, with the expectation (or at least hope) that the siblings will take care of their special needs brother or sister.

But such a strategy leaves too much to chance. Perhaps the other siblings suffer from a financial hardship and lose the inheritance to their creditors. Or, they might get divorced and forfeit some of the inherited assets in a matrimonial proceeding. Maybe they just decide they'd rather keep the money for themselves instead of using it to help out their sibling.

Even if the other children are committed to assisting their special needs sibling, there are both income tax and gift tax consequences if the "well" children use their inherited funds to help out their brother or sister.

The better option -- by far -- is for the parents' estate plan to include a specific share or amount of assets to be used to fund a "Supplemental Needs Trust" established under Federal and State law. Such Supplemental Needs Trusts -- which are governed in New York under Section 7-1.12 of the Estate, Powers and Trusts Law -- allow for the trust assets to be used by the Trustee for the "special needs" of the disabled child to supplement, but not supplant, available governmental programs and assistance. The trust assets can greatly enhance the special needs child's quality of life by providing a source of funds that can be used for many purposes including but not limited to vacations, electronics, and entertainment. Upon the death of the special needs child, the assets can pass to the parents' other children or descendants, or as otherwise specified in the parents' wills or trusts in which the special needs trust is created.

In some cases the parents do not have much in the way of liquid assets to fund the special needs trust, and they are concerned that the special needs child will not be adequately provided for after the parents' deaths. One possible solution to this problem is for the parents to purchase a "second-to-die" life insurance policy that will be used to fund the supplemental needs trust after both parents' deaths. Because these policies only pay-out after both parents have died, they are considerably less expensive than policies insuring one life only. With life insurance in place to provide liquid resources for the special needs child, many parents are then comfortable leaving the bulk of their remaining assets to the other children.