New Jersey Law for Children with Special Needs : New Jersey Special Needs Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Special Needs Children Planning & Trusts

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While it is critical to ensure that you have adequate planning in place to preserve your child’s eligibility for government assistance, it is important for individuals to know what government benefits are available to a special needs child and when these benefits are available. Because government programs can be confusing and since they change often, anyone seeking to learn more about receiving government benefits for a special needs child should consult an attorney or review current documentation on eligibility from each individual government program.

There are four relevant government benefit programs available to special needs families.  These are Supplemental Security Income (“SSI”), Medicaid, Medicare and Social Security Disability Insurance (“SSDI”). Both SSDI and Medicare are not means based programs. In other words, there is no investigation into your finances to determine if you qualify for the program based on your income or your resources. Medicare is a form of sponsored health insurance available for the elderly and the disabled and SSDI is available to individuals and minors or special needs children of an individual who has died, retired or become disabled. A special needs child who is under age 22 and who is not working can obtain SSDI benefits based on his or her parents’ prior earnings.

SSI and Medicaid are both means based programs. Eligibility for those programs is based on financial need and strict requirements must be met prior to receiving benefits. Medicaid can provide in-home care, cost of hospitalization and nursing home care as well as some housing benefits to recipients. A special needs child can receive SSI, SSDI, Medicaid and Medicare all at the same time.

The distinction between means and non-means based programs is important to understand. Since these benefits add greatly to a disabled person’s ability to receive care, and given the expensive cost of long-term medical and nursing care, anyone seeking to give a special needs child assets may disqualify him or her from receiving means-based program benefits. However, setting up a supplemental needs trust for your special needs individual can help provide for their care without disqualifying him or her from SSI or Medicaid benefits.

Although the requirements should be reviewed periodically for changes, currently, to qualify for SSI benefits, a disabled adult cannot own more than $2,000 of assets. There is a link between eligibility for Medicaid and eligibility for SSI. Eligibility for SSI makes a disabled person eligible for food stamps and Medicaid, which pays medical expenses, nursing home care and mental health services. Given the very low poverty threshold, setting up a supplemental needs trust can help provide for extra care over and above that which the government may provide.

In addition to applying for the benefits above, special needs individuals with developmental disabilities who reside in New Jersey should apply with the Division of Developmental Disabilities (“DDD”) to preserve availability for various benefits. DDD provides a wide array of benefits including day services such as support for people who are employed, residential services such as individual support that assists an individual living at home or elsewhere in the community, and family support services that assist families caring for loved ones at home.

Parents of special needs children should make sure their child will be protected after they have passed away as they have protected the child during their lifetimes. Given the cost of long-term care for a special needs child, you should consider whether government benefits can be helpful in meeting some of those needs. A typical plan for an individual may include drafting a will and creating a special needs trust. Also important are designations of trustees, a conservator in the event of future incapacity or a standby guardian for a developmentally disabled family member. In addition durable powers of attorney, living will and related documents should be in place. Finally, securing government benefits for a special needs child can enable that person to have the resources necessary for quality long-term care.

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Pooled trusts can be a good alternative to a special needs trust.  However, pooled trusts are not appropriate for everyone. To understand why, let’s take a step back and review some basics.

A pooled trust is a type of special needs trust.  Special needs trusts are designed to protect the assets of a physically or mentally disabled person, while still allowing that individual to receive government benefits.  To qualify for certain government benefits, such as Medicaid and Supplemental Security Income, an individual generally cannot own more than $2,000 of assets.

A special needs trust enables a physically or mentally disabled person to have an unlimited amount of assets set aside for their needs without being disqualified from government benefits.  This is because the assets held in a properly drafted special needs trust are not counted as that individual’s resources for purposes of qualifying for government benefits.  Funds set aside in a special needs trust allow the disabled individual to pay for extra care beyond what the government provides.

Pooled trusts are a way to provide the benefits of a special needs trust without having to set up and administer a separate trust. As with special needs trusts, pooled trusts can be funded with assets from a third party or assets of the person with special needs. Pooled trusts are required to be run by non-profit companies. The non-profit develops a master trust agreement governing all participants. In most cases, the pooled trust is administrated by a professional administrator, and the funds transferred into the pooled trust are then pooled and invested by an investment manager. Because a pooled trust accepts contributions from many beneficiaries, in theory the pooled trust is able to make more stable investments and provide additional management services that another type of special needs trust might not be able to provide. Like a special needs trust, transfers into a pooled trust do not preclude a person with special needs from receiving government benefits.

There are several distinctions between a pooled trust and a special needs trust.  For third-party assets, at the beneficiary’s death, the pooled trust will usually keep a portion of the beneficiary’s trust account to help fund other pooled trusts, while third-party special needs trusts allow 100% of the assets to pass to other family members of the beneficiary or anyone else chosen by the person who created the trust.   A pooled trust is managed by the manager selected by the non-profit and not by a friend or family member that has a personal relationship with the beneficiary.  In addition, with a pooled trust, the non-profit entity has control of the investments and disbursements. Once you surrender your money to the pooled trust you have no control over how it is spent or invested.

Despite these distinctions, pooled trusts can be a great option if the amount available to fund the trust is small or where there is no person able or willing to serve as trustee. You should consult an expert in this area to determine whether a pooled trust or classic special needs trust is more appropriate for your family.

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There are certain ages in a child’s life that are benchmarks for changes.  For some children, turning age 17 is an important day, since that is when the child can obtain a driver’s license and for some age 18 is an important age, when they become emancipated and legally adults.  For children with special needs, there are also important ages when life changes occur.

Age 18 is a magic age in the life of a child with special needs.  Prior to age 18, assets in a parent’s name are relevant in determining whether the child is eligible to receive government assistance.  As a result, limited if any government programs are available to most children with special needs before they turn age 18.  Once a child turns age 18, their parents’ assets are no longer relevant in determining whether they are eligible for many forms of government assistance.  Specifically, Social Security Income (“SSI”) and Medicaid are available to a child with special needs who meets the definition of disabled at age 18, depending upon the resources and income available to that child.  Generally speaking, a child cannot have assets in excess of $2,000 without compromising eligibility for government assistance.

It is important as your child approaches age 18 to ensure that there are no assets in the name of your child if government assistance would otherwise be available.  Any resources in the child’s name should be spent towards the child’s care.  If there are substantial resources beyond the amount needed to provide for that child, another option is to contribute assets to a pooled trust or a first party special needs trust.  In most cases, these contributions will not preclude the child from receiving government assistance although both a pooled trust and a first party special needs trust (discussed in more depth in prior blog articles) are fairly restrictive in their use and operation.  Better yet would be to ensure that no assets are ever accumulated in the name of your child with special needs.

Another issue which must be addressed as a child approaches age 18 is whether the child has sufficient ability to provide for himself or herself and handle their own financial and medical decisions or whether a guardianship action is appropriate to permit parents to continue to handle financial and medical decisions as guardians.  Guardianship proceedings takes three (3) to six (6) months to complete, and is handled through the Court.  As such, if it makes sense to have a guardian assume financial and medical responsibility for a child at age 18, this process should begin in or around the middle of the child’s 17th year.  If a child can handle his or her own affairs and simply needs assistance by parents, the child should sign a power of attorney and health care proxy when the child turns age 18 to permit parents to assist them with financial and medical decisions.  This does not remove autonomy from the child and ultimately the child’s decision controls; however, it will allow parents to assist the child with the child’s consent.

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Sometimes family members consider disinheriting a child with special needs to avoid putting the child with special needs at risk of becoming ineligible for government assistance.  Parents may leave assets to a typical child instead of dividing the assets between the child with special needs and the typical child, and they rely on the typical child to care for their child with special needs.  This is not, however, the best way of protecting their children.

A typical child holding assets for the benefit of his or her sibling could voluntarily or involuntarily jeopardize the assets.  The assets could become subject to the claims of the typical child’s creditors such as through a judgment from an automobile accident, a bankruptcy or a divorce.  Additional risks are that the assets can be exhausted by the typical child so that they are no longer available to be used for the child with special needs or the typical child may marry someone who has less of an interest in insuring that the resources remain available for the benefit of their spouse’s sibling.

Instead of disinheriting a special needs child, a better way to protect that child is to allocate assets to a special needs trust for the benefit of that family member.  Transfers to a special needs trust generally will not create any period of ineligibility for that child.  The assets in a special needs trust can be available to provide for the care of the child with special needs to supplement, but not replace, monies available through government assistance.

Use of a special needs trust guarantees that the funds will be held only for the benefit of the child with special needs and not for any other individual or any other purpose, while ensuring that eligibility for government assistance is not comprised.

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There are several circumstances where it is appropriate to terminate a third party Special Needs Trust. A third party trust is a trust that is comprised of assets that were either gifted or bequeathed from someone other than the trust beneficiary. Most commonly, a termination will occur at the beneficiary’s death. In this situation, the Special Needs Trust most likely directs where the remaining assets will be distributed. This could be other siblings or family members or charities.

Another reason why a Special Needs Trust will terminate is because the Trust is out of funds. This might happen if the Special Needs Trust was not adequately funded in the first place, if the beneficiary’s financial needs were greater than anticipated, or if the beneficiary outlived his or her life expectancy. Even if the Special Needs Trust still has some small amount of assets, the Trustee may decide that the costs of administering the Trust exceed the remaining assets and therefore, it does not make financial sense to continue to maintain the Special Needs Trust.

A third reason for terminating a Special Needs Trust is if the beneficiary is either no longer eligible for government benefits and will likely never be eligible for benefits or if a beneficiary no longer needs government benefits. In this type of circumstance, after all taxes and other expenses are paid, a properly drafted Special Needs Trust would direct the Trustee to either continue to hold the funds for the benefit of the beneficiary in a non-Special Needs Trust (that could be used for any reason for the benefit of the beneficiary) or it would direct the Trustee to distribute the assets directly to the beneficiary, outright.

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Families who do their best to protect their children with special needs often make several critical mistakes in developing their family plan.  Lori Wolf and Mary Browning of Cole Schotz recently wrote an article for NJ Family about smart estate planning for a special needs child.  Click here to read the article.

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A recent New Jersey Appellate Court opinion further confirms the importance of having a Will – especially when a special needs person is involved. The court overturned a state court judge who tried to use the “doctrine of probable intent” to create special needs trusts for a decedent’s daughters even though the decedent did not have a Will. The decedent had told relatives that she wanted to create special needs trusts for her daughters and contacted a lawyer to draft the trusts, but died before signing any Will or trust documents.

The lower court attempted to effectuate the decedent’s intent by allowing the personal representative of the estate to create these special needs trusts notwithstanding the fact that the decedent did not have a Will or trust document in place. The court used the “doctrine of probable intent”, which is a doctrine that has been used by courts in the past to reform a Will, typically for tax savings purposes. The doctrine allows the court to modify a person’s Will in limited circumstances based on what the decedent intended the Will to say.

The Appellate Court overturned this ruling on the grounds that the doctrine of probable intent should only be used when a person already has an existing Will. The fact that the decedent did not have a Will, and therefore, her assets passed via the New Jersey intestacy laws, precluded the court’s use of this doctrine.

As a result, the decedent’s assets passed to her daughters, outright. Some of the assets have been taken by the state Division of Developmental Disabilities to pay for residential care for one daughter, and the other daughter has lost eligibility for Medicaid and other benefits until her share has been used up. The case is yet another example of the importance of having the proper planning in place.
 

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Many parents, especially parents of young children, may be unsure at the time they are drafting their Wills if a child will qualify for government assistance in the future. The parents may be concerned that a child has a special need but may not know the extent when that child is young. Therefore, parents are hesitant to mandate that assets pass to their child in a special needs trust when such child may or may not need a special needs trust in the future.

An effective way to handle this situation is to draft a discretionary trust for the benefit of such child that allows the trustees the flexibility to create a special needs trust if the need arises in the future. A discretionary trust allows the trustees to distribute principal and income to a child for any reason in the trustee’s discretion. Alternatively, the trust could be drafted as a special needs trust now but could direct the trustees to convert the trust to a purely discretionary trust if the child no longer receives government benefits.

Parents should carefully consider the appointment of trustees of such a trust.  Because this is a lifetime trust, a parent should consider naming younger successor trustees and possibly even a corporate trustee to serve if all of the individuals appointed can no longer serve.

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A letter of intent provides the caregivers of a child with special needs a roadmap for taking care of that child. A letter of intent gives the parent a forum to communicate his or her wishes and concerns regarding a child as well as to set forth important information that will ease the transition of that child’s care to other family members at a parent’s death.

A letter of intent lists vital contact information such as the names and addresses of doctors, specialists and other caregivers. As importantly, a letter of intent also allows the parent to elaborate on the likes and dislikes of a child, such as food preferences, and daily schedules, such as bedtime routines. A letter of intent is helpful both to caregivers of a child and the trustees of a special needs trust.

A letter of intent is not a legal document – instead, it is a document prepared by a parent describing in detail any information that a parent feels is important for a potential caregiver to know about his or her child. Parents should update their letter of intent at least every year to make sure that all information is current and relevant.

Please contact us if you would like us to provide you with a sample letter of intent to get started.
 

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One issue often overlooked by divorce attorneys as well as their clients is the payment of child support when the couple has a child with special needs. Child support, although paid directly to a spouse, is considered to be an asset of the child for purposes of determining eligibility for means-tested governmental programs. To avoid disqualifying the child from governmental benefits, the divorce agreement should direct child support payments to be made directly to a first party special needs trust, instead of directly to the custodial spouse. The child with special needs will be the sole beneficiary of the trust and the custodial parent will be the trustee. In this way, the child support will be used for the child without disqualifying the child from benefits he or she may receive.

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A New Jersey appeals court upheld Medicaid’s denial of benefits after finding that the First Party Special Needs Trust for the benefit of the applicant did not shelter the applicant’s assets.

Medicaid determined, and the court agreed, that a First Party Special Needs Trust will not shelter an applicant’s assets unless and until the Social Security Administration or the New Jersey Disability Review Team determines that the beneficiary of such trust meets the federal definition of “disabled.” In other words, the fact that the applicant may meet the definition of “disabled” is irrelevant unless the Social Security Administration or the state Disability Review Team actually makes this determination.

In addition, the court agreed with Medicaid’s determination that the Special Needs Trust was not an irrevocable trust as required by law because the terms of the Special Needs Trust allowed the trust to terminate if it was deemed an available resource to the beneficiary for purposes of obtaining state or federal benefits.

Interestingly, this Special Needs Trust was previously approved by a New Jersey Law Division judge in connection with the applicant’s workers’ compensation case.

If you or a loved one is the beneficiary of a New Jersey First Party Special Needs Trust, you should have an attorney review the trust in light of this case in order to avoid a similar result.

For the full text of the case, see J.C. v. Division of Medical Assistance and Health Services (N.J. Super. Ct., App. Div., Nos. A-5632-07T25632-07T2, A-6297-07T2, Feb. 8, 2010).
 

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Individuals who become disabled as a result of an accident may receive a monetary award as part of a legal settlement of the case. If this happens, it is important that the individual, prior to finalizing the settlement, speak with a special needs attorney to determine the best way for the settlement to be paid.

The two most common types of pay-outs are the structured settlement and the lump-sum payment. The structured settlement often consists of an income stream (in the form of an annuity) as well as lump-sum payments that may be made at certain times, such as certain birthdates. The payments are usually based on the beneficiary’s life expectancy.

Whether an individual elects a structured settlement or a lump sum, these assets are considered assets of the individual. If, as a result of the disability, the individual would qualify to receive government benefits such as Medicaid but for the monetary award, the individual should consider having the award distributed to a trust for his or her benefit. An individual cannot have assets in excess of $2,000 in his or her name in order to qualify for Medicaid and SSI. If the award is paid to the individual, this eligibility test is not met. If instead, these payments are made to a First Party Special Needs Trust, the individual’s eligibility for governmental benefits is preserved. At the individual’s death, the remaining trust assets will be used to reimburse Medicaid for any money it has expended. Any money left in the trust can pass to successor beneficiaries named in the trust.
 

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Sometimes, when a parent creates a third-party special needs trust, he or she does not want the entire burden of decision making to fall on the trustees.  Or sometimes the trustees were chosen for their financial and investment savvy and background and they do not necessarily know how to handle the day-to-day life of the child with special needs.  In these cases, the appointment of a Trust Advisory Committee by the trust creator may be appropriate.

A Trust Advisory Committee is a group of people (typically 3-5 people) chosen by the person creating the trust or chosen by the trustee who are responsible for advising and making distribution requests on behalf of the special needs person to the trustee.  The committee is designed to provide insight, advice and information to the trustee with respect to the special needs person's residential placement, emotional, social, education, medical and therapeutic issues.  The committee usually consists of family members, a social worker, care manager, accountant, attorney, nurse, friends, etc.  These advisors have no legal authority over the trust, but the trustee is required to consult with them.

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The end of a marriage does not end your commitment to your child with special needs. First, it is important for any child support dedicated to a child with special needs to be allocated under the separation agreement to a special needs trust so that these assets do not affect the child’s ability to receive government assistance. It is important in connection with a divorce that each spouse consider the impact of the separation on his or her individual special needs planning. Each parent must have appropriate special needs planning in order to protect the child’s eligibility for assistance. Each spouse can have their own special needs trust with different trustees and different beneficiaries. Despite this, it is important that where possible, the parents of the child with special needs coordinate the funding of the trusts to ensure that adequate resources will be available to the child, and to ensure that the both spouses have incorporated the planning necessary to preserve the child’s eligibility for assistance.

If you incorporate special needs planning in your estate plan, but your ex-spouse has not, the planning you have done will not be enough to protect your child’s eligibility for assistance at the time that your ex-spouse dies.

In obtaining the divorce, one issue which is not often contemplated is who is responsible for becoming the guardian of the child upon the child’s attainment of age 18 (one parent or both together) and who has responsibility for educational decisions with respect to a child (this could be both parents or one). These issues should be addressed in a divorce agreement to minimize disputes following the divorce.
 

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The answer depends on what type of Special Needs Trust – a Third Party Special Needs Trust or a First Party Trust.

A third party trust, that is created to hold assets of another person for the benefit of the person with special needs, can be set up by anyone who is over the age of 18 and has the mental capacity to create such a trust. Typically, a parent or grandparent sets up a third party trust because they are usually the ones who are leaving assets to the person with special needs. However, with older couples, sometimes one spouse sets one up for the surviving spouse. In addition, a friend or other non-relative may set up a third party special needs trust to be the recipient of gifts from other friends of the person with special needs.

A first party trust, which is a trust created to own the assets of the special needs person, can only be created by a parent, grandparent, guardian or court. First Party Trusts have many more requirements than third party trusts and it is important that all formalities, starting with the creator of such trust, are followed.
 

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Families who do their best to protect their children with special needs often make several critical mistakes in developing their family plan. These mistakes are outlined below.

1. 529 Plan.  Often there is a 529 Plan in the name of a special needs child. The existence of this account in a child’s name can affect the child’s ability to receive government assistance. The 529 plan is considered an available asset of the child’s in determining his or her eligibility following the death of the individual who established the plan for such child. The best solution would be to change the designated beneficiary under the 529 Plan to name another child, if that is an option.
2. Custodial Accounts.  The presence of custodial accounts in a child’s name will also affect the child’s availability for government assistance. Custodial accounts are often established long before the child’s special needs are recognized. Parents must deplete any such accounts for the care of their child if the account has assets in excess of $2,000 to qualify for Medicaid assistance or allocate the assets to a pooled trust or first party special needs trust. Going forward, if there is a goal to allocate assets to or for the benefit of that special needs child, a special needs trust can be established by parents or other family members and gifts can be made directly to this trust account.
3. Retirement Plan and Insurance Policy Beneficiaries.  Often times, parents may have worked to develop a special needs trust to which their estate plan is tied, however they forget one critical issue. Life insurance policies and retirement plan accounts pay to designated beneficiaries and do not pass under an individual’s Will. It is vital that parents tie these assets with the special needs trust. If a life insurance policy or retirement plan account are paid directly to a special needs child, the receipt of the assets will affect the child’s ability to receive government assistance.
4. Discussions with Extended Family.  A discussion with extended family members who may want to benefit a special needs child is a difficult and awkward conversation for parents to have; however, the discussion is critical. Well meaning grandparents may allocate a portion of their estate to the special needs grandchild to make sure there are monies available to benefit their special needs grandchild and while intentions are good, the receipt of these monies could affect the grandchild’s ability to receive government benefits. Alternatively, a grandparent’s Will could leave assets to his or her children and if a child predeceases him or her, to the deceased Child’s issue (which could include a special needs grandchild). A bequest by grandparents to a special needs grandchild should be made to a special needs trust. If the parents of a special needs child feel there are family members who might make gifts or bequests to his or her special needs child, the parents should discuss with family members this issue to make sure that they understand that to the extent that they do want to leave assets to a special needs child, the assets should be left to the special needs trust created for the benefit of that child.
5. Use a Specialist.  It is important that parents use an attorney who specializes in special needs planning instead of a general practitioner since there are specific issues which must be incorporated in a special needs plan.
    

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Parents of a young child with special needs may be unable to assess whether their child will actually be eligible to receive government benefits in the future because of an inability to determine whether the child will be able to be self-supporting and earn income through employment as an adult. For example, children with Asperger’s Syndrome, mild autism and other issues may become part of the mainstream. Locking assets up in a special needs trust for the child’s benefit where assets are to be used for luxury items only may not be the best way of utilizing the assets towards the child’s care in those circumstances. In this situation, the parent’s estate plan can create the flexibility to reassess the situation in the future. The trust could initially be structured as a lifetime trust for the benefit of the child. The trustee could have the ability to make income and principal distributions to that child for health, education, maintenance and support purposes for the life of the child.

If, in the future, the trustee believes that the child has the financial savvy and wherewithal to handle the investments on his or her own, the trustee would always have the ability to make discretionary distributions of principal to the child or to terminate the trust entirely and distribute the assets to the child.

Alternatively, if the trustee determines in the future that the child cannot be self-supporting and would be eligible to receive government assistance, the trustee could have the flexibility to convert this trust at the time of that assessment to a special needs trust. The conversion would not require court consent and upon conversion, the trustee would have the ability to use trust assets for luxury items (items not otherwise covered by government assistance) such as equipment, vacation costs and therapies and any other expenses to supplement (but not replace) government benefits.

The family should be careful in assessing who is the best individual to serve as trustee of this trust as this person will be responsible for making the determination as to how this trust should be structured going forward. This flexible structure permits the child to achieve his or her potential allowing the trustee to use trust assets to enhance the child’s lifestyle, while ensuring that the trust will not create a impediment to the best care of the child where government assistance is needed in the future.
 

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There are two types of special needs trusts – one designed to hold assets gifted or bequeathed to a person with special needs from a third party (a “Third-Party Special Needs Trust”), and one designed to hold assets that are already deemed to be owned by that person with special needs (a “First-Party Special Needs Trust”).

A Third-Party Special Needs Trust is created to receive gifts and bequests from third parties, such as parents and other friends and family members. These trusts can be set up at any time to receive gifts or bequests from various friends and family members or can be set up under a parent’s (or other family member’s or friend’s) Will to just receive assets from that person’s estate.

Whether a Third-Party Special Needs Trust is set up during someone’s lifetime or under someone’s Will, the basic terms of the trust are the same. Third-Party Trusts provide that during the lifetime of the person with special needs, the trustee can use trust assets to provide for his or her well being after first considering the benefits which are provided through governmental assistance. The trustee is directed to use the assets for such child’s special needs, i.e. to obtain goods and services to maintain or improve his or her comfort, welfare and care, including luxuries beyond basic needs. The trustee can use assets to supplement basic health care services, to pay the expenses of his or her vacations, and to make improvements to real estate that would provide suitable housing for him or her. The trust is set up to preserve a child’s eligibility for whatever governmental benefits may be available under New Jersey law or the law of the state where the person with special needs resides.

At the death of the person with special needs, 100% of the remaining trust assets can pass to anyone that the grantor (creator) of the trust decides at the time of the creation of the trust. These beneficiaries are often siblings or other family members of the person with special needs.

A First-Party Special Needs Trust is a trust created to own the assets currently owned in the name of a person with special needs. These assets may be gifts or bequests from well meaning family or friends that were given to person with special needs either outright or in a trust that does not qualify as a special needs trust. These assets may also be assets received by a person with special needs in a lawsuit.

A First-Party Special Needs Trust can only be set up by a parent, grandparent, guardian or a court.  A First-Party Trust can only be set up for someone who is deemed disabled under the Social Security Administration definition. For a minor, a person would be considered disabled if he or she “has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” An individual age 18 and older is “disabled” if he or she has a medically determinable physical or mental impairment, which results in the inability to do any substantial gainful activity; and can be expected to result in death; or has lasted or can be expected to last for a continuous period of not less than 12 months.

Under a First-Party Special Needs Trust (as with the Third-Party Special Needs Trust), the trustee can use trust assets to supplement (but not replace) any benefits or governmental assistance such person is or may become entitled to receive.

One major difference between a Third-Party and First-Party trust is that in a First-Party Trust, at the beneficiary’s death, the remaining trust assets will reimburse Medicaid for any monies expended while the Trust was in existence for medical care, home health care or nursing home care of the person with special needs. Thereafter, any other public assistance programs which have a valid right of reimbursement under state or federal law will be repaid.

Any remaining trust assets will pass to those persons appointed by the person with special needs in his or her Will to receive the assets. If a person with special needs is under the age of 18 and/or is incompetent, then the assets will pass to those persons entitled to receive the assets under the intestacy laws of New Jersey.

There are also many reporting requirements for a First-Party Special Needs Trust that are not required for a Third-Party Special Needs Trust. Any new appointment of trusteeship must be disclosed to the Division of Medical Assistance and Health Services. In addition, as is required under Medicaid regulations (10:71-4.11 of the New Jersey Regulations), the trustee must file annually an informal accounting of the administration of the trust’s assets, income and expenses with the agency charged with the beneficiary’s Medicaid eligibility re-determination. Additionally (as is required by state law), the State of New Jersey must be given 45 days advance written notice of any expenditure by the trust in excess of $5,000, or of any amount which would substantially deplete the principal of the trust. Finally, subsequent additions to the Trust must be reported to the appropriate determination agency (any agencies from which such beneficiary is receiving benefits, such as Medicaid).

Although the First-Party Trust may preserve some of the assets of a person with special needs during his or her lifetime, at that person’s death, the money is subject to the claims of Medicaid and other agencies. Therefore, it is important that assets are never titled in the name of a person with special needs in order to prevent the need for a First-Party Trust. However, if assets are already in his or her name, it is important to create a First-Party Trust to at least preserve the assets during his or her lifetime.
 

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While having a properly constructed estate plan from a legal perspective is critical in protecting a child with special needs, it is equally important for the parents of a child with special needs to make every effort for a seamless transition following a parent’s death for the caregivers of a child.

Towards that end, a letter of intent is critical in providing assistance to future caregivers. As a parent, you know all of those special things about your child which likely no one else in the world does. You know what sets your child off and what calms your child down. You know what routines and schedules are important to your child and what items they need in bed with them in order to sleep soundly through the night. You know what therapies have worked with your children, what medications have worked and those that have failed to enhance the quality of your child’s life.

At your death, this critical information is lost unless recorded in some fashion that is easily accessible to the people who assume responsibility for your child going forward. This could mean future guardians, trustees of a trust for your children or simply family members who step into the void left upon your death. A letter of intent contains all of that information.

The letter of intent should be updated annually so that it always contains current information. If you would like a copy of a sample letter of intent, please let us know and we will provide you with one. Please note that this letter of intent should be updated annually as the needs of your child change over time. A copy of the letter of intent can be kept with your attorney or simply in a file clearly marked in your home. It is not a legal document and legal counsel is not required in order to prepare this document.
 

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Once your child turns 18 years of age, she is considered an adult and presumed to be competent. Physicians and other health care providers are bound to protect your child’s privacy under the law and are restricted from discussing your adult child’s medical care with anyone without her consent. A health care provider’s ability to disclose health care information becomes particularly complicated in the case of a patient with special needs that impairs their mental capacity. This complication arises because your child’s lack of mental capacity may prevent her from consenting effectively to the sharing of her health care information. Consequently, a health care provider may refuse to discuss your child’s medical treatment and other issues with you.

Another concern relates to protecting your child’s finances from individuals who seek to take advantage of her because of her special needs. As an adult, your child can enter into contracts and maintain bank and other accounts which can be exploited by persons with bad intentions. This is of particular concern where your child may be the recipient of a large monetary gift or the beneficiary of an estate or life insurance policy. Therefore, parents of a child with special needs who is going to turn 18 should consider applying to the courts of the county in which they live to be appointed as their child’s legal guardians. While guardianship applications can be made at any time and are routinely made for older adults under varying circumstances, making an application before your child becomes an adult insures that your ability to safeguard your child and to make medical and other necessary decisions for her will be seamless.

Guardianship appointments are flexible and can be comprehensive or, depending on your child’s functionality, be tailored to allow your child the greatest freedom possible to make medical, financial and other decisions. The process requires the filing of specified documents with the court that include one or more physician or psychologist certifications and, if applicable, a certification from the appropriate representative of the Division of Developmental Disabilities  ("DDD") for your region. The application process is streamlined and can be concluded within a few months. Parents seeking to protect their children with special needs should consider making an application for guardianship before the need to make significant medical, financial or other important life decisions arise. These applications are regularly incorporated into a family’s estate plan which often involves setting up special needs trusts and taking other measures in conjunction with guardianship applications to secure and protect the futures of your children with special needs.
 

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In preparing a Will, parents of a special needs child must give careful thought as to how to divide up their assets among multiple children. In deciding how to allocate resources, consideration should be given to the financial needs of each child, the ability of each child to support himself or herself both currently and in the future and the message sent to children in the decision of how to divide assets. There is no right or wrong answer but the general default rule of estate planning to leave assets equally to children should not be an assumption which is accepted without careful consideration.

When all children are very young, often assets are divided equally among children since all children are dependent at that time. As children get older, where a special needs child will have a large portion of his or her needs met through government assistance and may not have the expensive lifestyle of other children, some parents cap the amount allocated to that child (after ensuring sufficient assets are available to supplement monies from government assistance to provide the lifestyle the parent wants for such child) with the balance of the assets distributed to the other children.

Alternatively, parents may decide that other children will be able to support themselves in the future so a larger share of the estate should be allocated to a special needs child.

In considering this issue, the value of the assets to be divided up must be considered as well as the anticipated expense of each of the children and potential sources of payment of these expenses (earned income, governmental benefits, potential outside inheritances, to name a few). Further, since all of these variables change over time, the decision on how to allocate assets among children should be revisited every few years.

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The following are some examples of expenses and distributions that can and cannot be made from a Special Needs Trust. This list is not exhaustive, but is meant to provide some guidelines as to the proper administration of a Special Needs Trust.

Permissible Distributions

1. Purchase of home or condo, as long as rent is paid by the special needs person at its fair rental value from income he or she receives from SSI or other sources (other than payments from the Trust);

2. Home improvements and repairs by a third party;

3. School tuition, books and supplies;

4. Vacation travel;

5. Entertainment, such as books and magazines, movies, plays, electronic equipment, games, etc.;

6. Insurance premiums;

7. Transportation (such as purchase of a handicap van, car or train tickets);

8. Telephone and cable television expenses;

9. Dental care and other medical costs not covered by any benefit program;

10. Medical equipment and medical expenses for care not covered by any benefit program.

Distributions Which May Reduce or Eliminate Government Benefits

1. Shelter expenses, such as mortgage payments, real property taxes, utilities, etc., if rent is not paid by occupants. If the Trust owns a home that the special needs person lives in and he or she does not pay rent, SSI and other benefits may be reduced and Medicaid may have the right to take the home after the special needs person’s death;

2. Food;

3. Clothing;

4. Cash paid directly to the special needs person.

You should contact legal counsel if you have any questions about distributions from a Special Needs Trust.

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If you have an existing special needs trust, moving to another state could require a change to the trust in order to comply with the rules of the new state. This applies to both first-party trusts (trusts funded with the assets previously owned by an individual with special needs) and third-party trusts (trusts funded with assets gifted or bequeathed from third parties for the benefit of an individual with special needs).

Each state has different rules related to special needs trusts. For example, for third-party trusts, some states will recognize a basic discretionary trust as a special needs trust, while other states require more specific “supplemental needs trust” language to qualify as a special needs trust.

Each state may have different rules related to first party trusts, as well. Although many of the rules related to these trusts are imposed by federal law, many states require additional language or information in the trusts in order to ensure that the beneficiary of the trust who has special needs will qualify to receive governmental assistance. In addition, each state may have different reporting requirements. For example, some states require you to send a copy of the trust to each agency from which you are receiving benefits. Some states also require additional notice when certain dollar amounts are distributed from the trust. For example, in New Jersey, if an expense of $5,000 or more is to be paid from a first party trust, prior written notice must be provided to the New Jersey Division of Medical Assistance and Health Services.

Although special needs trusts are typically irrevocable, a well drafted trust should include a provision allowing the trustee (or the grantor in the case of a first-party trust) the right to modify the trust to conform with state or federal law. If your trust does not contain this language, and the state law of your new state does not allow a modification of the trust, you may need to apply to a court for a modification.
 

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Careful attention should be given in deciding who to name as the trustees of your special needs trust. These can be family members, friends, professional advisors or others. Trustees should be people who you trust implicitly and who have some financial savvy. This does not mean that you must name a financial advisor to be trustee of the trust, but the person named should be someone financially responsible who will use appropriate professional advisors. Another important criteria is to name a trustee who has your values so the decisions made in the care of your child with special needs are consistent with the decisions you would have made for your child.

One or more people can be named as trustees of a special needs trust. If more than one individual is selected, it is important to consider if unanimity should be required by the trustees or if majority vote rules should apply. If two or four individuals are named as trustees, consideration should be given to naming a tie-breaker who can resolve any disputes between trustees. This will quickly and efficiently resolve any deadlock without the need for court involvement.

In addition to selecting initial trustees, you should consider who you want to name as successor trustees if the initial trustee dies, resigns, becomes incapacitated or is otherwise unable to serve. If the creators of a special needs trust are married, and the trust is created during lifetime (and not at death through a Will), one spouse can be trustee of the trust and one spouse can be the grantor (the creator of the trust and person responsible for making gifts to the trust). The trustee can (if desired) be given the power to remove and replace successor trustees and to name new successor trustees.

In all cases, the last named trustee should be given the power to name successor trustees to hopefully avoid a situation where nobody is available to serve as trustee and a court appointed trustee is required.

Where there is no one individual or group of individuals who a family feels can adequately serve as trustees of a special needs trust, an institution can be named as trustee. This can be a financial institution (such as a bank or trust company) or an entity such as Plan/NJ which is specially designed to handle these situations.
 

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Beginning in 2009, the annual exclusion amount increased to $13,000 per person. The annual exclusion is the amount that each person can gift to anyone each year without any gift tax or use of the $1 million gift tax exclusion.

In order to qualify for the annual exclusion, the recipient must have a present interest in the gift. A present interest means that the recipient receives the gift today and not in the future. Trusts can be drafted in such a way to qualify for the annual exclusion by giving the trust beneficiaries the right to withdrawal up to the annual exclusion amount each year. Any amounts not withdrawn will stay in the trust. This right of withdrawal is often referred to as a "Crummey" power, named after a court case of the same name.

Special needs beneficiaries cannot have Crummey powers because having the right to withdraw this money could disqualify them from governmental benefits they may be entitled to. Therefore, generally, gifts to special needs trust will not qualify for the annual exclusion amount and instead, will use part of the donor's $1 million gift tax exemption.

One way to use annual exclusions with special needs trusts is to add additional beneficiaries to the special needs trust. The grantor’s spouse or siblings of the special needs beneficiary can be added to the trust, and thus, given Crummey powers, so that annual exclusion gifts can be made to the trust using annual exclusion amounts available to these additional beneficiaries.

For example, if a father creates a special needs trust for his son, the father can include the mother as a discretionary beneficiary under the trust. The mother would also have Crummey powers, thus allowing donors to give up to $13,000 per year to the trust using their annual exclusion amounts towards the mother.

If tax planning is important to you, make sure you are maximizing tax planning opportunities by creating and funding a trust for your children with special needs using available annual exclusions.
 

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The economy can have an effect on every aspect of your life, including your special needs planning. If the parent of an individual with special needs has lost his or her job, it’s important to note the loss of employer provided benefits and how this loss might affect your child with special needs. Health insurance coverage is vital for a child with special needs. 

Loss of benefits can also affect the funding of your special needs plan. In contemplating the assets available to fund the plan, group life insurance coverage is often considered. If your plan is dependent on these benefits in order to reach appropriate levels of funding for your special needs child, you should think about replacing these insurance benefits with a separate policy.

Additionally, as the value of your assets diminishes with the decreasing stock market values, again this can have an effect on funding. The reduction of assets available to fund a plan may require a reconsideration of the allocation of assets as between your child with special needs and other children. A child with special needs may not have the ability to be self-supporting in the future that other children may have.
 

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Just as it is important to go to the doctor, the dentist and the eye doctor and to review the status of your finances on a regular basis, it is as important to reevaluate your estate planning on a regular basis.

Over the course of any period of years, there can be multiple issues which arise – there can be changes to tax laws which affect planning decisions; there can be changes in a family’s financial situation (both increases and decreases in wealth) which affect the decisions that are appropriate; there can be changes in relationships with the people appointed to serve in various capacities (as executors, trustees, guardians); and there can be changes in situations with children which necessitate the need to revisit planning.

Where a child with special needs is involved, the need to revisit planning on a regular basis becomes even more paramount.  First, it is critical to ensure that there is adequate funding for a plan on a long term basis. Since in many situations, these children will not be able to support themselves, this issue take on heightened importance.  Further, changes in the law or in positions taken by state agencies may change what is appropriate for a special needs trust.  Evaluating your plan at least every 1 or 2 years is crucial to ensure that you have the best plan in place for you and your loved ones.

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With a financial crisis and ever increasing deficit, the Estate tax is likely here to stay.  Forbes.com recently published a few articles on the importance of estate planning - even if your assets fall well below the federal estate tax exemption (currently $3.5 million) (10 Estate Planning Moves to Make Now, Dems Dedicated to Death Tax and Why I Need a Will).  The articles mention New Jersey as one of the 16 states with a separate estate tax and one of only 2 states with both an estate and inheritance tax.

Proper estate planning (for both non-tax and tax reasons) is especially important for those with children with special needs.  Without a properly structured Will, New Jersey intestacy laws are unlikely to protect your child with special needs and could result in a loss of benefits for that child.  In addition, properly structured Wills that take advantage of the New Jersey and federal estate tax exemptions will help you save New Jersey and federal estate taxes, thus allowing more assets to pass to a special needs trust as well as to your other children. 

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Now is one of those times when it is important to revisit your planning. In the past few years, shifts in thinking by the Department of Health and Senior Services have resulted in positions being taken that would eliminate the effectiveness of many special needs trusts. In the past, under New Jersey law, it has been acceptable to create purely discretionary trusts where the trustees have the ability to use income and principal for the discretion of the special needs beneficiary, with no standard as to when the money should be used and in what manner. This created the greatest degree of flexibility in planning and was utilized much of the time. The alternative, the creation of a luxury trust that more specifically delineated how monies could be used, was less appealing as an alternative.

Due to constraints on government funds and an increase in the number of people becoming eligible for benefits in New Jersey, the government has taken a harder look at where benefits can be denied. Special needs children who have purely discretionary trusts have recently been denied eligibility for government assistance as a result of the trusts’ existence. There have been no changes in statutes or regulations that justify this change, however, as a result, it is critical that all special needs trusts be restructured as luxury trusts to best ensure that government benefits will be available to a child with special needs in the future.

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Estate planning is an important aspect of an overall financial plan for any individual, but it takes on even greater significance for the parents of children with special needs. Parents of children with special needs face a number of unique estate planning decisions that should be carefully considered with professional assistance. These considerations include:

Naming guardians. If parents pass away, who will provide day-to-day care for the special needs child? This is a critical and difficult decision and must be provided for in the parents’ Wills.

Creating a special needs trust.  A special needs trust is a trust that permits (but does not require) distributions to a child with special needs for a variety of reasons. Often, distributions are permitted only to supplement but not supplant monetary support that the individual is receiving from governmental benefit programs such as Social Security Disability Income (“SSDI”), Supplemental Security Income (“SSI”) and Medicaid. Failure to create a proper special needs trust can inadvertently disqualify the special needs child for these programs. The trust structure is also important to ensure that assets are not placed in a child’s hands before the child is responsible enough to invest and use the assets prudently (if ever).

The choice of trustee for a special needs trust is another critical decision. A trustee should have financial savvy, should have the parents’ complete trust, and should be or become knowledgeable regarding the child’s needs.

Powers of attorney.  A power of attorney allows an individual to appoint people to manage his or her assets and make investment decisions on his or her behalf. Having this document avoids the necessity of having to go to court to get someone appointed as a guardian if an individual cannot manage his or her own affairs. A power of attorney is important for all individuals, but in a special needs situation, it is important for both the parents and the special needs child.

Parents of an adult child with special needs should also consider whether a power of attorney is adequate or if parents should be named as guardians of the adult child to better protect the child’s interests. If there is a concern that the child cannot adequately manage his or her own affairs at all or could be taken advantage of, a guardianship (full or limited) may be more appropriate.

Life insurance. Life insurance is typically used to ensure that sufficient assets are available to provide adequate income to the surviving spouse and to provide for the care of children until they finish schooling and are able to earn a living. In a special needs situation, life insurance can be used to fund a special needs trust to ensure there will be assets available for the rest of the child’s lifetime. This may be especially important if parents can no longer provide the care the child needs.

While estate planning is essential for any individual, for a parent with a special needs child it takes on additional significance.
 

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