On-Demand | Special Needs Planning
- May 16, 2023
- Larry Seigelstein
This Special Needs Planning webinar covers actionable steps to protect the financial and emotional well-being of individuals and children with disabilities. Led by experienced estate-planning attorneys, this webinar covers legal instruments that you can use to protect your loved ones and how to fund such instruments.
Astrid, thank you so much. Thank you to everyone who is taking the time out of their very busy schedules to spend the next hour or so with us. Again, my name is Larry Seigelstein. I'm a Managing Director of EisnerAmper Wealth Management within the Eisner Advisory Group. Our practice specializes in holistic wealth management. We provide innovative, independent advice to successful individuals, families with multi-generational wealth and owners of closely held businesses.
We believe success is a collaborative effort, so we work closely with our clients, other trusted advisors to advance their wealth, help them embrace life, and prepare them for a successful future. At the heart of everything we do is care. We understand that true success goes beyond the numbers and dollar signs alone. True success requires a commitment to building relationships, founded in trust, and a deep understanding of your unique goals, passions, and opportunities. Today's subject matter is both sensitive and vitally important. May is Disability Awareness Month. We felt that it was important to present a webinar that addresses the potential thought process, approaches and planning that needs to be discussed related to family members who require special needs.
On this call, we might have a family member or close family friend who falls into this category or perhaps a client or employee. We hope that our time together today provides value and again, some forward-thinking about how to properly deal with such matters. Now, I could not be more excited to have two acclaimed trust and estate attorneys who have been our strategic partners and have helped guide many of our clients in these areas as well as complex trust and estate matters with us today. John McManus and Rocco Seminerio from John McManus and Associates. But before I turn it over to them, I just wanted to share a little bit about them and their practice. John is the founding principal of John McManus and Associates. He started this practice back in 1991. He represents individuals and families around the country and the globe with a very impressive resume, which I'm not going to go all into, but just a few accolades to mention.
He recently completed his term as President of Council for the Northern New Jersey Estate Planning Council. He has served on the Committee on Estates, Trusts and Surrogate's Courts of the Bar Association of the City of New York and the Real Property, Probate and Trusts of the American Bar Association. He is also a member of the prestigious Society of Trust and Estate Practitioners. And after 10 years of receiving Martindale Hubbell's highest rating as a practicing attorney, he was named to the National Bar of Preeminent Lawyers. Now Rocco Seminerio heads up the Estate Planning Practice Group at the firm within the Wealth Transfer Division. He oversees all aspects of estate planning, utilizing highly sophisticated planning strategies to serve the firm's discerning international and domestic clientele. So without further ado, welcome gentlemen and thank you so much for joining us today.
John O. McManus:
Thanks very much Larry for the kind words, for all of you in the audience. We have reserved nearly 500 attendees, so there will be questions that will be coming through. We will respond to them, if not, during today's presentation, we will respond here after to your questions. What drives us as a firm is not at all dissimilar to what you've heard Larry speak about. Our clients typically are among the ultra affluent. Our time is spent representing the most sophisticated and discerning in the community. The issues of special needs, however, are not ones that are exempt from the ultra affluent. What is important we feel in learning from the ultra affluent is how they have determined they need to solve for the issues when special needs topics are presented to them, what do they do to ensure that their children, their loved ones, are receiving the best care. At the same time, to ensure that where governmental assistance is available, that that is also taken advantage of.
How do they blend their desire to take financial instruments of their own to provide for those loved ones with special needs but not disqualify from governmental assistance? What are some of the key takeaways? What are some of the best practices? Because our firm has been representing these groups of individuals and families for over 30 years in the ultra affluent community, we together can see some of their best practices. We'll present them to you today equally because the consequences of failing to take advantage of special trust planning, special governmental opportunities, the kinds and types of care that those in the special needs category desire or available to them at the ultra affluent level, it's something that conserve as a lesson and a role model for those of more modest means. Many of you who are on this call are on here because you are a practitioner outside of the area of special need planning. We don't want you to feel that today's conversation is going to make you an expert. Today's conversation will focus on having you identify topics, number one.
Number two, to use the slides that we've delivered to you as a checklist and maybe something that you can give to a client who's been in this position. And number three, have you sensitive. This is an incredibly stressful and draining area for family members who have identified that there is someone in their family with a special need. Your comforting way, in addition to your wicked smart capacity in your area of tax planning, of financial planning and so forth is a welcomed gift. Today we want to give you as many gifts as we can that you can then take and give to those who are most important in your professional and personal life. So with that, we will move to this first topic and I introduce my colleague, Rocco. Rocco, take it away.
Thank you John. Again, thank you very much Larry for the great introduction. So for the first several slides, we're going to move a fairly quick pace because we want to lay out the groundwork and frame things, and then we're going to get into much more technical pieces that add value. Like John said, to help you guys identify for your own clients or family members, what's important to look out for and what options there are in addressing the needs of special needs individuals. So the first thing that we have in our slide is what special needs planning provides. The first is financial security. The first part of this of course is to address what financial needs we need to solve for. So that could be medical needs, that could be living costs, that could be educational costs. We need to understand what we're looking to solve for and then have a plan to make sure that we're protecting those assets.
Emotional security of disabled individuals, especially young children or adults that have these issues are often burdened. They have self-esteem issues. Are we surrounding them with the right people, advisors, family, friends, educational network to make sure that they're getting the right support? Really, really important to address not just the financial aspect but also the emotional aspect as well. The primary goal of special needs planning is really to enable the individual that has that disability to live as fully and as richly as possible. Very quickly, we're going to go down this list that you see in the slide and then we have subsequent slides that go into each one of them with more detail. First step of course, as part of special needs planning is to create and implement a plan. Part two is identifying the available resources that we have in order to solve for those items that we're looking to achieve.
Number three is we're going to talk about Supplemental Needs Trust and alternative strategies such as ABLE accounts. Number four is estate planning, especially for family members to provide for special needs individuals. Five is incapacity documents, particularly for the special needs individual. Number six, asset titling and beneficiary designations and the absolute importance of getting that right, this way, the plan as overall strategy works. So we're going to move to our first polling question, Astrid.
So thank you Rocco. So we're going to do polling question number two. No worries. Have you done any special needs planning for anyone in your life? A, yes. B, No. It's not applicable, C.
While you guys are answering that, John, maybe we can quickly speak a bit more about on the prior side of estate planning for family members and how that mixes with the ultra affluent when it comes to special needs planning.
John O. McManus:
Sure. So first of all, I think that one of the great things you just discussed, Roc, was the idea of surrounding yourself with high quality people who have experience in this area. Everything from community. So one of our offices while we work around the country, Roc, one of our offices is based of New Jersey. New Jersey has an outstanding program towards assisting in the public school systems towards assisting those with special needs. As an advisor, you should first be letting your clients know when you hear these items, where that they should be looking for, the best schools and the best communities. One of our residences is Basking Ridge, it is a town that has historically been recognized for ultra-high quality special needs education within the school system. But there are many others, and those are around the nation.
For years, I've been involved in the YMCA and chaired its board for Northern New Jersey. We watched people moving from out of the state to come into these communities and look for not just day planning at schools, but what charitable work is being done in the community organization. So it is really, really important for you to advise your clients first and foremost, let's see where are the strongest communities that can assist and provide support for you? And so from that, Roc, let's move on to the next need here, which is financial, medical, educational, emotional.
Thank you John. So of course relating back to our earlier slide, step one is to assess the needs of the special needs individual. So we have four categories, financial, so we touched on this before, but this includes living expenses, transportation. Especially if the individual has mobility issues. Healthcare, entertainment, aids, et cetera. Really want to be able to tally up what our future anticipate costs are to provide an accurate standard of living for our special needs individual. Part two of course is medical needs. What kind of care does the individual need, right? Caregivers, medication, doctors, aids as mentioned before. What kind of needs are we looking to solve for and how are we going to solve for it? Educational, so it could be extra help outside of school, tutors. What school are they going to? Things related to the general educational support and making sure that that special needs individual is really placed in the right environment based on how they are functioning.
And of course, emotional. A lot of special needs individuals struggle with a lot of self-esteem issues, feeling like they're singled out from the rest of the population. How do we solve for that? Again, it's all about environment and having a very strong support network. So as we move-
John O. McManus:
Before we move, Roc, the financial one is one where each estate will provide different levels of support, and Roc will address that with you in the coming slides. But those who are in the ultra affluent will typically fund many of these provisions and activities themselves. The struggle becomes when they pass away, how can they continue to have this ecosystem of support without disqualifying benefits, which could be two, three, $400,000 a year for the benefit of their child, but at the same time still giving that child a kind of financial support separate. So we'll get to that later on through the slides, Roc.
Absolutely, no problem. All right. Next on list is creating the plan. So after we assess the needs of our specific individual that we're looking to solve for, step two of course is creating the plan. So as a part of creating that plan, number one, of course is research and understand the individual specific disability and the needs that come along with that. Also speaking to experts, be it medical or otherwise that are familiar with dealing with individuals that have that same disability. Part two, which is something again we're going to cover in a bit more detail later is reviewing existing legal instruments. So powers of attorney, healthcare documents, guardianship appointments. Who's in charge? Who can make decisions on behalf of the disabled individual? Do they have sufficient capacity to make some decisions by themselves? Is it a joint effort?
Certainly things that we want to assess and take a look at. Speaking to financial advisors. What advisors does the family already have? Do they not have an advisor? Do they need an advisor to match the assets? Making that connection. But also this is where you guys come in as the tax professionals, as the CPAs, making sure everything's coordinated. Last but certainly not least is speaking to the legal advisors, right? Making sure that there's an attorney involved in the process, especially when it comes to special needs trust, which we're going to talk in detail a bit later in the presentation about. But really making sure everyone's working together as a cohesive team. Before we move to our next slide about potential resources, John, anything you'd like to add on this?
John O. McManus:
The only thing that several people have asked the question along the way, and that was, is this a presentation strictly for the ultra affluent? So just back to the beginning here, what we're trying to have folks understand is that take some of the best practices that the ultra affluent are doing and employ them when you are focusing on your special needs planning for your loved one or for your client. Throughout the course of this presentation, we're going to identify the areas of where you can receive government assistance, what a trust looks like to protect these assets and so forth. And that trust is not one reserved strictly for the ultra affluent. It is reserved for all those who are confronted with special needs. So I finished by saying hang in there, number one. Number two is let us learn from those who've been down this path and have been the most discerning. Because as we said, that this is not an area that is exempt from any financial category. And number two, then let's drill down and be specific about what each individual and family can avail themselves regardless of what their net worth and income levels are.
Thank you, John. We now turn to potential resources. So with regard to solving for the financial needs of the special needs individual, there's a couple of different sources. The first one is employee benefits, which can either be through the family members, the special needs individual or for the special needs individual themselves if they are working some capacity. Of course, that's not something that all special needs individuals are capable of doing. One thing might be through counseling services that are available through an employee assistance program. There are also some programs for adult parents that have special needs children for caregiver services. So if there's lapses in daycare coverage, there are employers that offer these kinds of programs. We want to make sure that clients are taking advantage of everything that's available to them.
Again, to preserve the assets as much as possible. Part two of course is personal assets, and we have another slide on this separate. But talking about things like through the management of normal investments, savings, of retirement accounts, life insurance. Again, we're going to talk a bit more detail in how those are used as vehicles. Lastly, we have government resources. A big part of this of course is to plan around and making sure, as John has mentioned, we're not disqualifying the beneficiary or the special needs individual in this circumstance unnecessarily from being able to qualify and receive various government benefits. And you're going to see as part of our next slide that we go through a list of the commonly available government benefits of that special needs individuals often qualify for. This list is not exhausted, number one.
Number two, of course it very much varies state to state, right? So specific states have their own different programs. Many of the programs are joint federal and state cooperations. The first of which is Medicaid, which I'm sure everyone on the presentation has heard of before, is of course health insurance. That said, it does have income and asset thresholds which are pretty low. So only certain clients of yours are going to be able to qualify for Medicaid disability when it comes to health insurance. But then comes in Medicare. So Medicare is only a federal program, it's also a form of health insurance. Unlike Medicaid, we don't have those asset or income thresholds. It is possible to be duly eligible for both Medicaid and Medicare where basically each program covers different services and there's different cost sharing as well. But again, to the extent that your client or your client's family member or a special needs is eligible, we want to make sure we're taking advantage of both of those programs if possible.
CHIP, which is the Children's Health Insurance Program. Again, it's basically a step above Medicaid with slightly higher income and asset thresholds than Medicaid has for again, medical or health insurance for children with special needs. It does vary significantly state by state, so that's important to take note of. SSI, Supplemental Security Income, okay, this is monthly payments to persons with disabilities. Similar to Medicaid, there are comparably low income and asset thresholds here. Social Security Disability Insurance, SSDI. This is important because it does tie into Medicaid in terms of the eligibility for it. Typically, if you are receiving SSDI for a period of two years, you're also eligible for Medicaid disability. SSDI are payments based on earnings or contributions and of course this will be a problem for special needs individuals that don't have a work history, but there is a Disabled Adult Child benefits program that's based on the parents' earnings or contributions in terms of FICA taxes paid into social security.
So that's also something that's very important as to provide income for our special needs individual. Last two items here are SNAP, right? That's basically a food stamps program. It provides assistance for groceries for low income families. The last piece is assistance with housing, that's Section 8. That's a housing voucher. Again, very low income or low income families only, but it does help not entirely cover the cost of rent, but at least 70% in many instances. So with that being said, we have our next poll and then I would like John to speak to the importance of seeking counsel when it comes to these programs.
John O. McManus:
Before I do, thanks Roc, well done on that. There was a question regarding for ultra-high net worth clients, what would they fund trust with? Could you do private equity? Would you do alternative investments? What are some of the challenges? So for one, another client also asks what ultra-high net worth is? For us, it's commencing at 25 million of net worth and up where there is a taxable estate between husband and wife and where the growth continues from that point. A big part of our work focuses on family meetings and succession planning and charitable giving and special needs planning, who will take care of that child in the event that there are issues or crises that are confronted. But our typical ethos is number one is making sure that we are not funding assets in a disproportionate amount for which that child may need. Our historic rule was somewhere between one and two million dollars because the government is going to provide something along the lines of 90 to 95% of what the child will need.
But there are other instances where the client may say, I don't care what the government provides, I want to transcend that and want to give even more. We have an instance of a family that I was involved with at a charity where they built a group home for their child and it's like the Ritz-Carlton with eight or nine families in it, and each of those children would qualify to go into that. But at the same time, I want to emphasize that we are not huge fans of moving big amounts of assets into trust for that child because of so much of the governmental assistance that begins. So we will highlight that piece. Others are asking questions, how can we find out the specific programs within the state that we work? There are attorneys and other professionals whose job is to ensure that your clients and you on this call are receiving that governmental assistance. It is not an area that we focus, our job is to refer to these specialists, but state by state it varies. There is no question seeing what Roc presented earlier that we want to ensure that every benefit out there you are receiving as one with that child. So thanks so much, Roc.
Absolutely. Thank you, John. All right, so moving on to our next slide. Guardianship. This is really, really important. John are and I are going to speak to the interplay between using powers of attorney and guardianship, but the first question is really what should I be concerned with as my child reaches the age of majority, my special needs child, or if my child or a loved one becomes incapacitated at a later date? Post the age of 18. The solution will typically first be using a power of attorney, which we'll speak more to in a second. But outside of that, the only recourse that we have of course is a guardianship proceeding. So that is going to involve an actual complaint filed the court, depending on the state that we're in. It often involves an investigation by a court appointed attorney into the suitability of the guardian that's seeking to be appointed as guardian of the special needs individual. And then there's usually a hearing where the judge will determine, make findings of fact and actually appoint the guardian themselves. John, before we go on to the next slide with the powers of attorney, would you like to speak to more about the guardianship piece here?
John O. McManus:
There are two components to guardianship, those who are incapacitated in their youth and were anticipating once they're 18 years of age, depending on the state of majority, that then there will be a time when we're now right at that age where we need to move to have that child have a guardian appointed. Not all children or even maybe the majority of children who have special needs choose to have a guardian appointed, but it's essential topic because if the child is not able to make clear decisions, we want the court to give you authority. Once you are named as guardian, your role is not just unbridled. Typically there's a bond that has to be posted. The judge that makes a determination that you are conserved looks at you merely as the court's representatives. So you have to report back what you're doing with that child's assets and decisions that you're making.
Guardianship can also come with the elderly or someone who's been in a terrible accident, same set of facts. And the child or the individual that is up for guardianship will have their own separate counsel who hopefully will collaborate with you when you're in the process of making your application before the court. But a very, very important point, especially with young children, that as you get close to the age of majority, you are ready for that application period. We're going to keep moving along Roc because we have so much to share and so little time.
Absolutely. Thank you John. And just very quickly, 10 seconds on guardianship. Generally when it's just the parents involved, pretty much smooth sailing typically, unless the special needs individual is over 18 is combative in some sense. But just be mindful if there's any family dispute about who should be guardian, guardianship proceedings can be lengthy and costly. So if we can avoid them, we'd love to do so. All right, so one of the big questions as a part of special needs planning is were there any legal documents signed by the individual, the special needs individual prior to the incapacity event, right? Presume they were adult at the time? In other words, did they sign healthcare and power of attorney documents when they were an adult before they lack capacity? Or even if they are still in a state where they have some measure of capacity and they are still of course a special needs person, have they signed the documents? Are they in place?
Just quickly going through each one of these. So power of attorney is going to address really all financial, legal and personal decisions. It's an extremely powerful and flexible document. It's what we would rely on to avoid the guardianship process to be able to enter the special needs individual into a group living circumstance, to be able to pay bills, to deal with the government on their path. Extremely important and powerful. Healthcare Directive and Proxy is the document where we're formally appointing individuals to make medical decisions for that individual. Whether that involves just day-to-day medical care or more serious things like surgery. Living Will is an expression of that individual's wishes in the circumstances of a terminal condition or where God forbid they are in a persistent vegetative state and what their wishes might be in this very dire circumstances.
And the last document we have on our list here is the Authorization for Release of Protected Health Information, which is related of course to the federal privacy law, which is HIPAA. So that comes from 1996. Very important to have a separate authorization to allow the family to obtain medical records information and also transfer those records to other healthcare providers. Before I move to our next slide, John, is there anything else you want to touch on on this topic?
John O. McManus:
Sensitive to time, two quick things. Powers of attorney are short-term solutions to a long-term issue. A power of attorney, if it was executed before the individual became incapacitated, understand that there will be a fuse that's lit and that who decides that usually is financial institutions, the government and so forth that says it's no longer valid and it's central for you to realize that you're going to likely have to move to guardianship. The second piece is that a power of attorney is an individual giving you the power to act on their behalf but can be revocable at any time, so that when you have it, it can help make quick decisions but it is not something that is a permanent fix. We were recently confronted with a set of facts. One, a contractor that works with us who now is demonstrating significant cognitive decline and the family is struggling. She is capable of doing a power of attorney, but this will not solve the long-term issues. It handles the short-term piece right now. Thanks so much, Roc.
Absolutely. So what are we trying to accomplish with this idea of a Supplemental Needs Trust? So Supplemental Needs Trust sometimes called a special needs trust interchangeably or abbreviated as SNT is a vehicle for putting assets into the same such that it does not impact the eligibility of the special needs beneficiary for government benefits. So the goal is to surpass basic support for the individual. The idea is that the trust is intended to pay for things that the government does not. Okay, so necessities not covered by public benefits. And we have a few examples here. We talk about nicer clothing, airfare to visit family. We have our fantastic Taylor Swift, a picture here, concerts for example for entertainment purposes, car for a non-paid family aid and entertainment generally. So really important. And John, because of how important this is, especially to high net worth clients, would you like to add any more color here to this slide?
John O. McManus:
Well, this is for all clients. The answer here is we have always been confronted by people who say, look, I can fund the governmental assistance, I can support that. And I believe philosophically it is my job to do that. We could spend years discussing this topic. I have a daughter that is a human rights lawyer, another one on her way, another one that works at the U.N. We are very, very focused on solving for the community. At the same time, others say we're spending 40% of every dollar that we make paying for in taxes. This is our right to have this. But the big piece Rocco is if you don't protect the governmental pieces, you will burn through the assets that you have over the course of your lifetime, but normally for the special needs child, and then you're out of money for serving as a supplement. And then all you can apply for is governmental assistance.
And this long happens after the matriarch and patriarch pass away, whether they're ultra affluent as our clients are or not. And so the idea, and we have a client right now who absolutely loves to go to concerts. It is maybe five or $600 to go to a high quality concert. If you're in New York City, Nicole, one of the people who has helped on this preparation is going to the Taylor Swift concert. It's a thousand dollars for those tickets or maybe 2,000. But for a child with special needs, this may be the only thing they ask for in the next 12 to 24 months. And so the money inside the trust enables them to do something special and yet not disqualify them from what they get day to day. Maybe it's this, it's flying to see their brother and sister and bringing a guardian along who live on the opposite coast.
We have people from here to California and down to Florida and back. And so we see people spread around. But there is no doubt that we need to look at this and say, this pot is just to supplement. And if you don't have the special needs planning, then it means that your financial assets will be used first to be burned down and then you will have no supplement and you will only then apply. It could be five years, it could be two years, it could be 20 years, but at that point it's just what the government provides. No extra blankets, no nice clothing, no funding for travel across the country, no tickets for Taylor Swift. So that is why it is such an important piece to remember in your planning that separate assets are designed to be protected and why the government allows for this planning. Thanks, Roc.
Thank you John. So in terms of Supplemental Needs Trust, there are two main types. First-party and third-party, and they're primarily focused about who is funding the trust. A first-party trust, also known as a D(4)(a) trust is a creature of federal law. The idea is that when a special needs individual uses their own assets to fund a trust, they're permitted to do so and still have those assets not disqualify them from government benefits. The classic example is someone who, for example, is in an accident, as a result of that is disabled. We actually had a client whose son was in a motor bike accident in his twenties, left severely disabled as a result of it, had a lawsuit, the proceeds with lawsuit went to him, which then went to a D(4)(a) or first-party Supplemental Needs Trust.
Now there's some downsides to this trust. The downside is that of course it must be irrevocable, number one, which means in terms of flexibility to change it, not as easy as it otherwise would be. But number two, it's subject to recovery by the state. So when the special needs beneficiary passes away, any assets left over in that trust have to be paid to the state to the extent that the state has rendered services on behalf of the special needs individual, where it's almost deferring the payment of that by at least allowing the beneficiary to qualify in the interim. Part two is third-party Supplemental Needs Trust. So this is where when you think of a typical SNT where a family member such as a parent or a grandma and grandpa trust for the benefit of a special needs individual. This kind of trust is not subject to Medicaid recovery. We're going to talk about in the next two slides about how we can structure it, be it revocable or irrevocable. John, before we turn to that distinction, anything else you'd like to add on this point?
John O. McManus:
I just want to highlight Roc that you know that I am very dogmatic about the idea that all planning should be set up in such a way that Medicaid does not seek a recovery after the special needs individual passes away. But I have moved to your, we'll call it the side of light on your part Rocco, and realize that if our essential theme here is to have a pot of available cash that serves to supplement. And then after and still get governmental benefits and then after that beneficiary passes away that there is a reimbursement, it least avoids a situation where this child or adult who is in need is not being deprived of that pot of available assets to supplement them during their lifetime. And we can solve for that with lots of neat things. Yes, you could put some additional funding together in the trust more than anticipated life insurance, we'll talk about that in a minute. So all of those are great ways, Roc, that I view that even though it's imperfect for Medicaid reimbursement, it's still better than not having the planning in at all.
Without question. Without question. All right, so in terms of the pros and cons of each of these, just very quickly, revocable trust of course are not complete gifts for estate tax purposes. So that means that to the extent your client funds a revocable trust such as with real estate during lifetime, that property is still part of the tax bill state. We get our step-up and tax basis. But the most valuable piece of course is that you can change a revocable trust at any time to change the trustee succession or the trustee mechanisms or the terms for the beneficiary or who the beneficiaries are your special needs beneficiary has passed away. All that's very easy to change. Downsides of a revocable SNT is any assets in that trust are still available to the creditors or the grantor and it is part of the taxable estate for the one who's funding that trust.
And on the flip side for irrevocable trust, these are trusts that are typically designed as complete gift trust where it will be protected from the grantors and the creditors and will not be part of the taxable estate. So what we're trying to solve for the dual objective of gifting and for special needs planning, this is a possibility. And of course John, I know you would love to talk about not funding these trusts generally or not being too aggressive. Maybe you want to speak to caution against overfunding these kinds of trust.
John O. McManus:
Just because of sensitivity on time, the only piece that I would highlight here is these trusts in my mind predominantly are designed to serve as the receptacle of gifts after those that are funding and providing for their loved ones pass away. The trust can be created during their lifetime. It serves as the receptacle or the receiver of the gifts. When the parents pass away, it creates that pot to continue the gifting. I like to keep it revocable because the laws can change over the course of these special needs child's lifetime. There are others including you Roc that say, make it irrevocable, we can decant, which for the audience means we can change that trust over time. There is work to be done on that. We can move assets. One client talked about moving private equity and other private investments into the trust to see the growth take place off their balance sheet. I don't like to see trust for special needs be used as part of tax and estate planning to get assets off the balance sheet. I'd rather have it in separate trust and then have those trusts serve to fund the special needs trust after the patriarch and matriarch pass away.
That is irrespective of what financial level the clients are. It's about having them pay the difference for the quality of life, for the Taylor Swift concert during the parents' lifetime, whatever they can afford or not pay, making those decisions but then creating a pot after they pass away. I am not a fan of funding the trust and then distributing from the trust during clients' lifetimes. You will find differing views on that. To me, this just seems to be most effective for our clients. Go ahead, Roc.
Thank you John. Priorities when planning or preparing a Supplemental Needs Trust, right? So very quickly, and this is something again we encourage you to speak to an attorney estate planning or a special needs attorney in the design of the trust. Very elementary pieces here. Trustee selection is very important, right? Want to be choosing someone who is going to be willing to work with the family's advisors, number one. Number two, someone that presumably has a good relationship with a special needs individual. We want dedicated and built out successor trustee mechanisms. Also, flexibility for the granters to be able to change that over time. Terms of the trust, right? In addition to the basic language about the trust, not supplanting, but supporting government benefits for what they do not cover. Very important to make sure that we're allowing the trustee if advisable to make distributions to the beneficiary that would otherwise disqualify the beneficiary for government benefits if it's in the best interest of the beneficiary.
In other words, if the standard of living provide to the beneficiary by benefits is not sufficient according to the trustee, they feel that the assets can support a greater standard of living and a better quality of life and making a distribution would partially hurt those benefits, we want to make sure the trustee has that discretion. Last two pieces, not on this slide, but we also want to make sure the trustee can fund ABLE accounts from the trust. We'll talk about them in just a second. Also want removal powers so that we always have a checks and bounds of system on the trustee. And last piece is coordinating with family and friends who wish to make gifts to the special needs individual. If there's an existing trust, they should be making those gifts, of course not to the special needs individual but to that trust for their benefit. So I have to be very careful about making sure that everyone's on the same page.
So when and how to fund a special needs trust? So you just heard John speak about, listen, ideally we're not typically funding the special needs trust during the lifetime of the parents unless we have a separate pot where other family members want to make contributions to. So we have some basic asset categories, real estate and other investments of course, and a very special point about retirement accounts. So as many of you are aware, in 2019 the Secure Act changed the landscape for inherited IRAs and other tax deferred accounts. One special carve out however to the new 10-year rule is that when you name a special needs individual or disabled individual beneficiary or SNT for that beneficiary, we actually still get the stretch. Okay? So really important tax planning for your clients is identifying this key piece where they might want to allocate more of their retirement accounts to a special needs trust to get that stretch in those tax benefits if the tax are from growth of the account. Life insurance. John, do you want to talk about the benefits of life insurance and special needs plan?
John O. McManus:
Two quick comments. Number one is as a general rule, every high quality estate plan, regardless of net worth at the highest level of course, life insurance is a central component. It's used to pay for estate tax. It's used to fund quality of life. It's used to create liquidity. What I love about life insurance, and Larry Seigelstein's firm does considerable work. There are three or four top carriers in the free world among a thousand carriers that have been around for 150 years and Larry uses those firms. It is my view that life insurance is a great way to create the liquidity to fund the special needs trust. Do I look at it as a 10 million dollar gift? Absolutely not. I look at it as a one or two, but no more than three million dollars of funding because it's designed to create an income stream to provide the additional support that your loved one would need. And of course that touches on the next piece, Roc, which is to take caution not to overfund on these trusts.
A hundred percent. All right, so how to blend estate planning with a special needs trust. As John's already touched on this, but to very quickly go through it, if you have a life insurance trust for estate tax purposes, you can absolutely point that to a separate special needs trust that the grantors or your clients have created during lifetime. Likewise, like John has pointed out, often we have the revocable special needs trust that becomes irrevocable only upon the death of your client. There is the option to do an SNT as a sub-trust under an ILIT, Will, or revocable trust. But as John hinted at before, not our favorite approach. We like to have that as a separate vehicle.
John O. McManus:
Before you go, Roc, just quickly. What we feel is the most effective and best practice is to have a life insurance trust hold insurance and it can hold 500,000 or 50 million and then point a fraction of that life insurance to a trust for the benefit of the special needs child. So you have insurance insider trust, it is estate tax-free, it's irrevocable, and yet it still makes sure the funding takes place for the benefit of the child whose trust was revocable during parent's lifetime. They get amend, they can modify, unfund it. Number two is that it becomes irrevocable and then effective. And then in comes the cash when the child passes away. One other tiny piece in that respect Roc, and that is if you have rich aunts and uncles, and we have an article that was posted this weekend, in the past week in the journal, what happens if you pass away without a will?
And at this point, after doing this work for 30 plus years at comparatively significant levels, it's something that I didn't feel the need to read, but I was compelled anyway to read it. And I looked at it and said, as we prepare for this presentation, I said, imagine if you're doing all this beautiful planning and you have the assets insulated so that we're not disqualifying your child or your sibling or another family member from governmental assistance. And then your rich aunt passes away without a will and she's got one niece and one nephew and that is one that's special needs. Now this money comes flowing down and that child is now disqualified from governmental assistance until they burn through their aunt's assets. That is a shame. So as you look at your planning, think about any extended family members who if they passed away, your child or your loved one would be the beneficiary of it. It's called dying intestate. So if your aunt and there's only two living relatives and you need to check how the descendants order works if you die without a will, it's stuff that we do all the time. We make sure that there's never an issue in that respect or at least we plan around it. Thanks Roc.
Absolutely. Thank you John. So before we mention an alternative strategy to an SNT, certainly not as a replacement but another tool in our arsenal kit. So it's an ABLE account. This is a sister account to a 529 or educational account. It's a tax-free savings account. It can be used to pay for disability related expenses. And the nice thing about it is it doesn't affect eligibility for government benefits. Now there are some limitations. We can only have one account per individual. We can have multiple people in the family make contributions to the account. We cannot have that account funded more than $17,000 in a single year. It used to be 15, it's now $17,000. The value of this account is when you have two or three million dollars inside a special needs trust controlled by a trustee who is not the special needs individual.
If the special needs individual has a degree of independence and we want to encourage that, set up an ABLE account and having them as the authorized person on the account allows them to have some spending independence where they can use money in a way that won't disqualify them from those government benefits. We do want to be very careful about how much that accumulates to. Anything excess of a hundred thousand dollars will suspend SSI eligibility, but another important piece to have in our toolkit. Last piece here on our slides before we turn over questions and answers is, what is a letter of intent? So this is really, really important when you're doing a special or Supplemental Needs Trust, it's a supplementary document, it's not legally binding. It's really where we lay out the most heartfelt wishes of our clients in terms of, okay, what kind of directions are we giving to the caregivers, the guardians, the trustees about how to use these funds, right?
About dietary restrictions that that special needs child might have, right? Schedules, routines, to list your specifics about Medicare, education, employment parameters, maybe there's special relationships in the family or special contractors. We want the relationship to continue. Really, really an important stuff. Before we wrap up and go to our questions, John, do you want to say anything about letters of intent?
John O. McManus:
Right. Thanks for this Roc. I love the way you're blending things like an ABLE account and other areas where irrespective of net worth, these are things, especially for those who are not at the ultra affluent level. But this one here is the most beautiful telling component of what sophisticated people do. It's what we do once, twice, three times in planning during the year is to help come up with the family mission. What is the goal for each individual family member within the family to function at its highest level? Who will be the leaders to look out for, in this instance, the special needs individual? What additional support can they have to help around them? Who will their successor be? What does a residence look like when we're speaking about this? Are we prepared to dig into the trust and effectively break the parameters that allow us to qualify for governmental assistance in order to give a higher quality life?
For sure, if we have the resources. But this is a roadmap that cannot be understated for its relevance, even as you say, final arrangements in life. And also support with respect to mental health. With some frequency, we see our clients who are getting regular consistent counseling for their special needs child who's become an adult. So I love this slide as one that just blends all economic levels, Roc. This is the qualitative items that we can't emphasize enough.
For sure. With that said, we have our last polling question. And while this is up, just to wrap us up, I don't think we have too much time. There's some really great questions that came through and we'd love to answer them after the fact. Do we want to have final remarks before we wrap up, Larry and John?
I'd like to see if we can answer a couple of questions real quickly. There's a lot of them. Thank you everybody. They're coming in on rapid fire. Obviously for those who are looking for CPEs, please answer this last question that's polling. But from a macro standpoint, a few people are asking John and Rocco, how do you define special needs? What conditions whatever it may be where an SNT might be necessary, can you address that real quickly?
John O. McManus:
I'll take my first shot at it, Roc. So the SNT, special needs is when, number one, your child is receiving governmental assistance, right? Or will need governmental assistance because this child cannot operate in their lives alone. We often will see that means that they have to be in a group home or in some assisted living facility. Very frequently we see clients' children who are working and find it purposeful and gratifying. So all of those are key pieces. If we think whether the patriarch and matriarch are alive is less relevant, but if they pass away, what do they look like? What does the fact pattern look like and will there be a need for governmental assistance to support them? And if that is the case, then we certainly want to have a trust that will allow us to support the child as much as possible, but not disqualify from that governmental assistance.
Terrific. Thank you, John. The hour is up and obviously I wanted to thank everybody for joining us. I know there was a lot of material covered in this at a very quick rate. We're going to try to answer everybody's questions. And obviously if there's demand, we could always try to have a follow-up webinar addressing this. But I wanted to thank everybody for attending, taking your time with us today. And of course I wanted to thank John and Rocco for their intellectual property, their expertise, and for sharing some insight into the special needs planning area.
John O. McManus:
Our pleasure. Thanks so much. One individual thanked us for the focus on the letter of intent. From our souls, this is the qualitative piece. Hearts break and struggle with the children that need and adults that need this help. And so often it's what will happen to my loved one and my child when I'm not here. And the work that you do in setting these structures up during your lifetime, and you need to get to it, right? John Lennon says, "Life happens while we're busy making plans." There is no time better than today to get to this work. And thank you so much, Larry, for giving Rocco the privilege to run through these slides and for me to offer a little bit of color along the way. These slides are here as a checklist for you all and don't hesitate to ask us further questions hereafter.
Thanks so much. Thank you Astrid. Thanks everybody.
Thank you everyone.
Transcribed by Rev.com
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