Special Needs Trusts:

The right way to handle inheritances for Disabled Children and Adults

What happens if a relative dies and leaves money directly to a disabled child? When the child inherits the money, the child loses her SSI (social security disability benefits) and Medicaid (health insurance) benefits. This situation is easily avoided by establishing a “special needs trust.”

The main purpose of a special needs trust is to leave funds to a disabled child or adult without forcing the loss of SSI benefits and medicaid benefits. SSI is “needs” based, so if the disabled child inherits money he or she may flunk the “needs” test and lose benefits. Generally, the disabled child can have only $2000 in assets (plus certain exempt assets like a car etc.) to qualify for SSI.

A special needs trust will allow the disabled child to continue receiving SSI payments and Medicaid insurance benefits while also supplying “extras” for the child during her lifetime. The only limitation of a special needs trust is that it cannot pay for housing, food or clothing, but can pay for almost any other “non-necessary” item.

Who can benefit from a special needs trust?

Young children who may, or may not, need SSI in the future can benefit from a special needs trust. (The trustee can simply distribute it to the child if its not needed later.)
Those with Downs syndrome or other permanent disabilities and who will not be able to support themselves
Adult children who are unable to work because of other mental, emotional or physical disabilities.

Three Types of Special Needs Trust

There are three types of special needs trusts. These are very well described at:

http://www.marthachurchill.com/ddsnt3types.htm A special needs trust usually is set up in your will or living trust. Instead of leaving the funds outright to the child it goes to a trustee of the special needs trust. A special needs trust can also be set up by the probate court. This is usually done when operating in “emergency” mode and the parent died with no will or with a will that left funds to the disabled child outright.

How to Distribute to Disabled Children

There are typically three ways that parents and other distribute funds for a disabled adult or child:

The child is disinherited and left nothing. My opinion is that this is kind of harsh. I generally discourage this option.
The funds for the disabled child are left outright (not in trust) to another child to manage for the benefit of the disabled child. This is the “verbal” trust. The parent is hoping and trusting that one child will care the disabled child. I don’t like this approach, although sometimes it does work.
A special needs trust is set up to hold the funds for the disabled child. This is almost always the best choice. In some cases two trusts are set up, and the trustee has the right to select the amount in each trust: one is for general use and the other a special needs trust.

There are two great articles on the web site of attorney Stephen Leimberg at http://www.leimberg.com/ entitled “Families with Special Needs Children: A Guide for the Financially Perplexed Parts 1 and 2” that cover how to determine the amount to be left to a disabled child and the other factors to address in establishing a special needs trust.

This is just a brief look at a big topic. If anything special needs trusts are underused, but they are great option for the many people trying to plan for disabled relatives.

Do Not Resuscitate Orders (DNR)

Not just yet, only the doctor can issue one

The internet is a great way to find information, but some information can be misleading. For instance, there is a Do Not Resuscitate Order (DNR) floating around various websites. This is a new form as of 7/1/01 that was put together by the Illinois Department of Public Health. An example of the official state-mandated DNR order is reproduced in a PDF file that you can view by clicking here. One would think, for the wide availability of the order, that the DNR form is one that everyone should have on hand, but that is not the case. You should NOT fill this out for yourself or a relative.

While the form is available on the internet, it is supposed to be supplied only by physicians for their patients. The DNR order is prepared by the doctor after consultation with the patient and must be on bright orange paper. Sometimes, the patient is too ill to sign such an order so the patient’s agent under his or her health care power of attorney completes it after consultation with the doctor. The doctor and two witnesses must sign it. The DNR order says that no resuscitation will be given if a patient’s heart stops. If you have an accident, such as choking on food, the DNR order still allows health care workers to give you the Heimlich maneuver or take other appropriate action.

The DNR order applies only to non-hospital, emergency situations only, such as those that paramedics might be involved in. The DNR order does not apply to a hospital stay. A living will cannot be recognized by emergency health car workers like paramedics, but the DNR order will be followed.

So don’t rush to add a DNR order to your other health care documents. A health care power of attorney and a living will are the two necessary health care documents that everyone should have in place.

Biggest Pension Reform in Years is Here

(Note: This information is from Leimberg Information Service www.leimbergservices.com, a great information service on estate planning.)

Pension reform is here. “Pensions,” as discussed here, include all kinds of retirement accounts including 401Ks, IRAs, Roth IRAs and profit sharing plans. These affect all of us. They especially affect anyone who owns their own small business and has a profit sharing or 401K.

Pension reform arrived with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, signed into law by President Bush on June 7. This legislation represents the most significant change in pension law in over twenty years. All of the changes kick in for plan years beginning in 2002, unless otherwise indicated.

WHAT IT MEANS TO YOU: In 2002 you will be able to put more in your 401K and IRA accounts. If you are self-employed you can significantly increase your contributions.

Summary of the Changes

401K’S LIMITS INCREASED: The maximum individual deferral limit for 401(k), 403(b), 457 and SARSEP plans is increased to $11,000 in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005 and $15,000 in 2006. For SIMPLE IRA/401(k) plans the amount will increase to $7,000 in 2002, $8,000in 2003, $9,000 in 2004 and $10,000 in 2005.

RETIREMENT PLAN CATCH-UP PROVISIONS: Participants age 50 and older may also defer additional "catch-up” contributions. For 401(k), 403(b), and 457 (government plans only) plans, these additional amounts are $1,000 in 2002, $2,000 in 2003, $3,000 in 2004, $4,000 in2005 and $5,000 in 2006. For SIMPLE IRA/401(k) plans, the catch-up contributions are $500 in 2002, $1,000in 2003, $1,500 in 2004, $2,000 in 2005 and $2,500 in 2006. These catch-up provisions will not be subject to the annual deferral limits
(except the 100% of compensation limit) or cause a plan to fail the ADP, coverage
or top-heavy nondiscrimination tests.

IRA CONTRIBUTION LIMITS INCREASED: Contribution limits to both traditional and Roth IRA's will increase to $3,000 for 2002 through 2004, $4,000 for 2005 through 2007 and $5,000 in 2008. CATCH-UP PROVISIONS: Like the retirement plan rules, additional "catch-up" contributions of $500 for2002 through 2005 and $1,000 in 2006 will be permitted. Note that the new law does not change the current rules for deductibility of IRA contributions.

COMPENSATION LIMIT: The maximum compensation that may be considered under a qualified plan will increase to $200,000 from $170,000.

ANNUAL ADDITIONS: Under current law, the individual employee limit for all contributions to all qualified plans maintained by an employer is the lesser of $35,000 or 25% of compensation (§415 limit). This will increase to the lesser of $40,000 or 100% of compensation. COLA in multiples of $1,000 will apply thereafter. Important: Significantly increased contribution limits for middle and lower income plan participants will result.

PROFIT SHARING EMPLOYER DEDUCTION LIMIT: Important: Deduction limits for profit sharing plans are significantly increased through a combination of three changes.

First, the deduction limit is increased to 25% of participant compensation from
15%.

Second, participant 401(k) deferrals are separately deductible and are not
included as employer contributions when calculating the 25% limit.

Third, the definition of compensation used when applying the 25% limit will
include participant deferrals. These changes will eliminate the need for most
employers to maintain a money purchase pension plan to maximize annual
contributions.

ROTH CONTRIBUTIONS: Beginning in 2006, 401(k) and 403(b) plans may allow plan participants to designate all or a portion of their elective deferrals as after-tax
contributions. Earnings on such designated amounts will be distributed tax free
provided certain rules similar to the Roth IRA rules are followed.

Copyright 2001 Thomas F. Sammons P.C.