Planning for Special Needs

Cashflow considerations

A good place to start is the cash flow considerations necessary for the long-term success of a financial plan for a special needs individual. The fundamental elements of a cash flow plan are identifying: 1) anticipated living and medical expenses; 2) what income sources are in place and whether additional assets are required to supplement the income sources; and 3) how long will the assets last given the likely costs and expenses. This will allow you to begin planning how to make sure the required assets are available both now and in the future. 

Next you may want to consider scenarios to stress test your plan. What if the costs of care were to increase? What if something were to happen to the primary caretaker or a source of financial support provided by a family member ceased? This might occur when a parent or other financial sponsor becomes disabled, loses capacity with age, or passes away. An individual may also lose access to government funding or programs. How does this change the probability of success for the cash flow plan? What contingencies can be put in place to make sure the plan still works?

The plan is a living document and should be revisited periodically, not only to make sure that it remains relevant under existing circumstances, but also as a tool to help make decisions when substantive changes are being considered regarding investment strategy and spending goals.

Asset protection considerations

Another important consideration is to not disqualify the individual for public benefits that are essential for the continued success of their plan. Understanding the rules of qualifying for public benefits in the state where the individual resides is an important part of the planning process. 

Transferring assets without restriction to the individual may have a substantial impact on their ability to receive essential public benefits. These benefits often come from Medicaid and Supplemental Security Income (SSI). Depending on the availability of assets or income, the individual may be rendered ineligible for SSI and Medicaid. Some of the lost benefits may include assisted housing, employment assistance, medical assistance, personal care aides, and transportation assistance.

In planning for the continued receipt of public benefits, one option that may be considered is leaving assets to other family members. This is usually done with the understanding that the other family members will take the individual's needs into consideration. One issue with leaving assets to others is that there may be no formal plan for the benefit of the special needs individual. What if that other family member were to suffer from incapacity, disability, or death? What if the assets become subject to their own creditors or divorce? What if their subsequent decisions are not in line with your goals or the needs of the individual being planned for? Or what if the entrusted family member mismanages the funds even with the best intentions? 

One strategy to address these questions is to leave assets to a Supplemental Needs Trust (SNT). A SNT is designed to provide access to trust owned assets that will not otherwise disqualify a beneficiary from receiving public benefits that are available based on their needs and income levels. The trust must follow requirements regarding continued qualification for these benefits.

Additionally, an SNT may be considered a first or third‐party trust. A self‐settled SNT created by the beneficiary is considered a first party trust, while a trust created and funded by someone other than the beneficiary is considered a third‐party trust. There are different rules regarding each of these trusts. It is important to consult with a qualified attorney who has experience in drafting Supplemental Needs Trusts to make sure that it is drafted appropriately based on the individual circumstances of the intended beneficiary. 

Some additional benefits that may be realized through an SNT are to provide 1) a level of asset protection against misuse of those funds; 2) protection from claims from creditors, such as landlords, credit card companies, and other lenders; and 3) proper investment management of the assets to increase the probability that they will meet the long‐term needs of the beneficiary. In creating a SNT, consider the benefits that a professional trustee may provide in terms of administering the trust.

Tax planning considerations

As more US taxpayers accumulate wealth for retirement inside of qualified retirement plans (such as 401(k), 403(b) and IRAs), there is growing deferred tax liability not only for the account owner, but also the legacy that they leave behind to others. Those qualified retirement assets are generally passed on to others in the form of an Inherited IRA.

An additional consideration for creating an SNT is that it may be designed to be the beneficiary of an inherited IRA. The SNT will receive and administer the required minimum distributions (RMDs) received from the Inherited IRA. While the default rule for Inherited IRAs with an individual beneficiary is 10 years, there is an exception to allow a disabled beneficiary to stretch the distributions out over their own life expectancy. However, if the trust is not drafted properly, not only could the distribution period for inherited IRAs be reduced to just 60 months, but the trust might disqualify the beneficiary from receiving public benefits. Under previous law, to qualify for the extended life expectancy RMD term, a trust would be required to distribute IRA withdrawals to the beneficiary in the same year the trust received those withdrawals. These trusts are referred to conduit trusts.

However, a change in the law at the end of 2022 now allows the trust to retain the IRA withdrawals inside the trust and still qualify to use the stretch method for calculating RMDs. The retention of IRA withdrawals in a properly structured SNT can enable the Inherited IRA assets to last longer due to increased tax deferral. Keeping funds in the SNT can also preserve the beneficiary's eligibility for government benefits.

There may be other considerations particular to a person's plan or circumstances. In the end, this is a process that should be done under the advisement of an attorney who specializes in planning for special needs. It is also helpful to engage a team of advisors who can help achieve the planning objectives through assistance with preparation of a long‐term cash flow analysis; design and implementation of the appropriate investment strategy; and ability to provide professional trustee services. In closing, an organized plan done with the right team can help ensure the needs of the beneficiary are met now and into the future.