What You Need to Know About Estate Planning for Special Needs

Planning for a loved one with special needs requires careful consideration to protect their quality of life and eligibility for government benefits. This guide offers essential tips to help you create a meaningful, comprehensive estate plan that supports your special needs family member without jeopardizing government programs or the interests of other heirs.

Table of Contents

• Careful Consideration of Asset Division Among Your Children
• Do Not Disinherit Your Loved One with Special Needs
• Choosing a Trustee for a Special Needs Trust
• Understanding Taxes and Expense Allocation
• Planning for Incapacitation
• Review Beneficiary Designations and Asset Titling
• Using Life Insurance to Fund a Special Needs Trust
• IRA and Retirement Plan Considerations
• Preparing a Letter of Intent (LOI)
• Coordinate Your Estate Plan with Other Relatives

Careful Consideration of Asset Division Among Your Children

It is not required to divide your estate equally among your children. Instead, consider each child’s individual needs. A child with special needs often requires more support throughout their life. It is important to explain this approach to your other children, who may be self-sufficient and able to manage without equal inheritance.

Do Not Disinherit Your Loved One with Special Needs

While disinheriting a special needs child might protect eligibility for means-tested benefits such as Supplemental Security Income (SSI), Medicaid, and Section 8 housing, this approach can be overly simplistic.

Instead, establishing a special needs trust allows your child to inherit while preserving eligibility for government benefits. Consult a special needs planning attorney for tailored options.

Choosing a Trustee for a Special Needs Trust

The trustee must have “sole and absolute” discretion to maintain the beneficiary’s eligibility for SSI or Medicaid. While a family member might seem the natural choice, conflicts can arise that harm your loved one’s future. Consider alternatives such as:

• Professional trustees (attorneys or financial institutions)
• Granting the trustee authority to delegate tasks to professionals
• Appointing a family member with a trust advisor for investment decisions
• Designating a trust protector to remove and replace trustees acting in self-interest

Understanding Taxes and Expense Allocation

Decide how estate taxes and expenses will be allocated among inheritors and trusts. If your special needs trust is responsible for taxes, it may reduce the funds available to support your loved one. Clearly specify these details in your estate plan.

Planning for Incapacitation

Include provisions in your durable financial power of attorney that allow your agent to make discretionary distributions to benefit your special needs child. This may include the authority to establish and fund trusts like a “sole benefit trust,” which can help preserve Medicaid eligibility if you require nursing home care.

Review Beneficiary Designations and Asset Titling

Ensure your assets are titled properly and beneficiary designations do not inadvertently disqualify your special needs child from government benefits by passing assets directly to them.

Using Life Insurance to Fund a Special Needs Trust

Consider a “second-to-die” life insurance policy naming your special needs trust as the beneficiary. This can provide a significant funding source upon the death of both parents. Always consult a special needs planning attorney before purchasing life insurance for this purpose.

IRA and Retirement Plan Considerations

Retirement accounts such as IRAs and 401(k)s have required minimum distributions that can adversely affect means-tested benefits. Funding a special needs trust with these assets might trigger immediate tax liability and reduce available support for your child.

Preparing a Letter of Intent (LOI)

A Letter of Intent is a personal document outlining your child’s daily routine, preferences, medical needs, and other important details. This letter is invaluable to trustees and caregivers unfamiliar with your child’s unique needs and ensures continuity of care and quality of life.

Coordinate Your Estate Plan with Other Relatives

Other family members may name your special needs child as a beneficiary in their estate plans, which can affect benefits eligibility. Encourage coordination to direct inheritances into a third-party special needs trust, which can efficiently handle gifts and bequests without creating multiple trusts.

Consult a Special Needs Planning Attorney

These tips serve as a general guide. Every family’s situation is unique, and working with a special needs planning attorney can help create a tailored, comprehensive plan to protect your loved one now and in the future.