Special Families, Special Plans: Key Considerations When Advising Families of Children with Disabilities

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1 Special Families, Special Plans: Key Considerations When Advising Families of Children with Disabilities Ellen Cookman Cookman Law Karen Park Bernstein

2 Ellen S. Cookman, Esq. Certified Specialist, Estate Planning, Trust and Probate Law, The State Bar of California Board of Legal Specialization Principal at Cookman Law J.D., UC Berkeley School of Law (Boalt Hall) LLM, Golden Gate University Law Clerk, Chief Judge Anthony J. Scirica, Third Circuit Court of Appeals (Philadelphia, PA) Volunteer for Sunday School program for children with special needs California State Bar No

3 Karen Park, Principal, Bernstein Mom to three boys, one of whom has special needs (Milo) 6 surgeries, complex global developmental delays, undiagnosed ( Closing speaker at 2017 UCSF Rare Disease Symposium Advisor to (Seattle Times, NPR, KQED) AAC/AT speaker (PODD), Support for Families Financial planning for special needs children 2

4 Goals of Special Needs Planning Maximize child s quality of life Protect child Maximize child s independence Maximize public benefits Name surrogate parents Avoid the court system 3

5 Examples where Special Needs Planning May Be Needed Inheritance for special needs child Family with a developmentally disabled child who turns age 18 Gift made to special needs niece/nephew, aunt/uncle Parent with Alzheimer s in need of nursing home Adult sibling becomes disabled from degenerative disease (ALS, MS), a stroke, an accident Any time public benefits might be involved! 4

6 Estate Planning Tools for Special Needs Families 1. Limited Conservatorship 2. Durable Power of Attorney 3. Advance Health Care Directive 4. Revocable Trust 5. Special Needs Trust ** 6. ABLE Act Account (new!) ** 5

7 Public Benefits primer Means-tested benefits vs. Entitlement benefits 7

8 Means-Tested Benefits In general, must have under $2,000 in total nonexempt assets to qualify SSI: Supplemental Security Income Income program: up to about $890/month Medicaid ( Medi-Cal in California) Health care program for the poor and disabled If you receive just $1 in SSI, automatically receive Medi-Cal In Home Support Services ( IHSS ) At-home health care -- drastically reduced 7

9 Means-Tested Benefits (cont.) Veterans Administration Aid and Attendance Program ( A&A ) Approx. $80,000 resource limit Section 8 (Housing) different asset limits Exempt (not counted towards eligibility): house, car 8

10 Entitlement Benefits SSDI: Social Security Disability Insurance Must have paid into the system, worked a certain number of quarters or credits Some can qualify on a parent s work record Medicare Available to people over age 65 Once you receive SSDI for 2 years, you automatically qualify for Medicare, even if under age 65 10

11 Medicare vs. Medicaid/Medi-Cal Medicare Run primarily by federal government Entitlement-based 3 types of coverage: Parts A, B, and D Hospital visits (Part A), doctor visits (Part B), prescription drugs (Part D) Does NOT cover longterm care in skilled nursing facility Medi-Cal State and federal partnership program California is the most lenient! Eligibility based on income, resources Primary federal insurer for long-term care 10

12 Here is a big issue: If someone is receiving means-tested public benefits and receives a gift, inheritance or judgment of over $2,000, he or she becomes ineligible for those benefits. 11

13 What to do? Create a Special Needs Trust A Special Needs Trust ( SNT ) is an IRREVOCABLE trust designed to hold assets for the benefit of a disabled person without disturbing eligibility for public benefits. 13

14 3 rd Party SNT A third party (i.e. a parent, grandparent, uncle, friend) sets up the SNT for the disabled child Typically funded at third party s death You CAN fund SNT while third party is still alive, BUT it counts as a gift - No $14,000 Annual Exclusion (typically) 13

15 1 st Party or d(4)(a) SNT Funded with Disabled Person s Assets (the first party ) Limitations: Beneficiary must be Disabled Beneficiary must be under 65 Trust must include payback provision Can only be created by parent, grandparent, guardian or by court petition 14

16 Permissible Expenditures Entertainment, education, counseling, therapy, companionship, adaptive aids, medical care, furniture, travel, non-essential utilities (cable, telephone, newspaper) Automobile and operating costs Clothing Food and shelter (with possible reduction of benefits) Residence (plus sufficient liquidity required to maintain property) Distribution of cash to beneficiary can be problematic 15

17 Choice of Trustee: Options Family Member Friend Private Professional Fiduciary Bank Nonprofit Pooled Trust Combination 16

18 Oversight Available for SNTs? Typically NO court involvement Trust Protector Co-Trustees Advisory Committee 17

19 Memorandum of Intent Informal letter from parent to future caregiver describing needs of the disabled child: What makes her happy/sad? Food restrictions? Preferences for housing Activities to pursue Relatives and friends to remain connected 18

20 REAL LIFE EXAMPLES 19

21 Example #1: Jones family Ed and Mary Jones have 3 children: Jason (age 18, has special needs) and 2 younger typical girls. What planning do they need? 20

22 Example #2: Claire Claire is age 25, has special needs, works part-time, receives SSI and Medi-Cal. What planning might she need? 21

23 Example #3: Martin family Mr. and Mrs. Martin have a 12-year-old son, Joey, who does not have capacity and is not able to work or communicate. What planning is needed? 22

24 Example #4: Maryam Maryam, age 30, receives SSI and Medi-Cal. She just received a $50,000 inheritance from her aunt. What planning is needed? 23

25 Key Factors to Consider When Putting Together a Financial Plan Your child s needs What is the nature of your child s disability? How is his/her health? Any sense for his/her life expectancy? Is he/she able to work and generate income of any kind? Can he/she manage his/her own money? Does he/she have any assets in his/her own name? Is asset protection important? What public benefits can he/she qualify for? Are you interested in looking at group home options? How much spending do you think will be required on an ongoing basis to maintain his/her lifestyle? Do you anticipate any major changes in his/her lifestyle (living situation, caregivers etc.) in the foreseeable future? Your goals What lifestyle do you want for your child after you pass? What is necessary to make that vision a reality? Are there any rainy day scenarios that you are concerned about? What is the dynamic between this child and their siblings? What kind of role do you want the siblings to have after you pass? Are there any extended family who are involved? 24

26 Spending Needs Will Vary Based on Individual Circumstances Basic Needs 50K Annually More Complex Needs 100K Annually Lifestyle and Team Needs 200K Annually Clothing Cable/Phone/Ins. 300 Transportation 200 Household Needs 100 Maintenance 100 Personal Care 75 Entertainment 100 Travel 300 Professional Fees 300 $200/month Housing Costs 1,800 Food 700 For illustrative purposes only. Source: AB Clothing $250/month Cable/Phone/Ins. 400 Therapy 800 Transportation 300 Household Needs 300 Maintenance 100 Personal Care 150 Pet Care 75 Entertainment 200 Travel 500 Professional Fees 1,600 Companion 1,000 Housing Costs 1,800 Food 850 Clothing $300/month Cable/Phone/Ins. 400 Therapy 1,000 Transportation 300 Household Needs 400 Maintenance 200 Personal Care 200 Entertainment 300 Travel 800 Professional Fees 3,400 Companion 4,500 Housing Costs 3,000 Food 1,000 Medical Specialists 500 Communication Equip

27 Bernstein s Wealth Forecasting System SM Personalized Investor Profile Financial Goals Liquid Assets Illiquid Assets Income Requirements Risk Tolerance Tax Rates Time Horizon Scenarios Spending Amount Asset Allocation Benefits Funding Method Bernstein Wealth Forecasting System 10,000 Simulated Observations Based on Bernstein s Proprietary Capital Markets Engine Hypothetical Range of Future Wealth GREAT MARKET PATTERN (10% of probable outcomes are above this result) TYPICAL MARKET PATTERN (50% of probable outcomes are above this result) HOSTILE MARKET PATTERN (90% of probable outcomes are above this result) Based on the current capital-market environment Incorporates various account types and planning vehicles Predicts likelihood of meeting long-term goals, reflecting what is known and unknown The Bernstein Wealth Forecasting System is based upon our proprietary analysis of historical capital-market data over many decades. We look at variables such as past returns, volatility, valuations, and correlations to forecast a vast range of possible outcomes relating to market asset classes, not Bernstein portfolios. While there is no assurance that any specific outcome suggested by the model will actually come to pass, by quantifying the possibilities of achieving financial goals under changing, and sometimes extreme, capital-market conditions, the tool should help our clients make better choices. See Notes on Wealth Forecasting System in the Appendix. Source: AB 26

28 Sizing Your SNT Will Depend on a Multitude of Factors ($ Millions) Initial Funding Required* 60% global stocks / 40% bonds *Results indicate initial portfolio value needed such that it can sustain the given level of inflation-adjusted spending, $50,000, $100,000 or $200,000, over a 20, 30 or 40 year period with a 90% level of confidence. Global stocks are defined as 21% US diversified, 21% US growth, 21% US value, 7% US SMID, 22.5% developed international and 7.5% emerging markets. Bonds are defined as intermediate-term in-state municipal bonds. Based on AllianceBernstein s estimates of the range of returns for the applicable capital markets over the periods analyzed. Data do not represent past performance and are not a promise or a range of future results. See Appendix for further details. 28

29 Understanding How to Divide Up An Estate Sharon, 75 years of age, widow Four adult children, including Ava who has special needs Total Assets: $10 million Taxable Assets: $4.3 million IRA Assets: $3.4 million Real Estate: $2.3 million Sharon s annual spending requirement: $100,000 annually, inflation-adjusted Sharon has established a Special Needs Trust (SNT) for her daughter Ava, age 45, that will be funded from her estate Ava lives in a government-sponsored group home and only needs nominal support (~$1k/year) for incidentals Sharon wants to plan for a rainy day scenario should the group home cease to operate; she estimates it would cost approximately $100,000 per year to recreate the same level of care privately Primary concern: fully funding the SNT so that the three non-disabled siblings never have to contribute to Ava s care post-estate administration 28

30 Scenarios Modeled SNT Funded Trust Distributes $100,000/year* SNT Spending Begins In Year 40 Scenario A No Spending SNT Spending Begins In Year 30 Scenario B SNT Spending Begins In Year 20 Scenario C Years Today Sharon spends $100,000/year* For illustrative purposes only. *All spending is modeled to adjust for inflation. 29

31 The Amount the SNT Will Need Depends on When the Trust Will Need to Begin Providing Support ($Millions, Real) Required Trust Funding at Year 20* Per $100,000 of Spending, Inflation-Adjusted 90% Level of Confidence $3.5 $2.4 Scenario C $1.2 Scenario B Scenario A 10 years of spending begins in year years of spending begins in year years of spending begins in year 20 *Required trust funding at year 20 is the amount of money the trust will need to be funded with such that it can support $100,000 of spending, after-taxes and inflation-adjusted, beginning in year 40 for 10 years, beginning in year 30 for 20 years or beginning in year 20 for 30 years with a 90% level of confidence. Assumes a moderate asset allocation of 60% global stocks and 40% bonds. Assumes top marginal Federal and California tax rates. Based on AB s estimates of the range of returns for the applicable capital markets over the periods analyzed. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on the Wealth Forecasting System in the appendix for further details. 30

32 What % of the Estate Should be Allocated to the SNT? The estate value in 20 years depends on how it is invested today Asset Category % Risk-Mitigating 80% Equities 20% Cash 30% Diversifying 0% Return-Seeking 20% Total 100% Fixed Income 50% *80% Risk-Mitigating includes a 30% allocation to cash, 10% to short-term bonds, 20% to intermediate-term bonds and 20% to long-term bonds. 20% Return-Seeking includes a 14% allocation to US Growth stocks and 6% Developed Foreign stocks. 31

33 Growth of Sharon s Liquid Estate Over Time ($Millions, Real) Probability 5% 10% 50% 90% 95% After Taxes and Cashflows $8.2 $7.5 $6.9 $8.0 $7.8 $7.6 $6.9 $6.2 $5.8 $5.6 $4.6 $3.7 $7.5 $5.0 $ *Net of $100,000 annual inflation-adjusted spending. Based on AB s estimates of the range of returns for the applicable capital markets over the periods analyzed. Asset values represent the estimated value; if the assets were liquidated, additional capital gains or losses would be realized that are not reflected here. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on the Wealth Forecasting System in the appendix for further details. 32

34 What Percentage of the Estate is Needed to Fully Fund the SNT? ($Millions, Real) Sharon s Estate Year 20 Liquid Assets* $5.0 Real Estate** $2.3 Total Estate $7.3 Scenario A Scenario B Scenario C SNT Funding*** 10 years of 20 years of 30 years of spending begins spending begins spending begins in year 40 in year 30 in year 20 $1.2 $2.4 $3.5 % of Total Estate 16% 33% 48% Numbers may not sum due to rounding. *Median wealth values. Based on Bernstein s estimates of the range of returns for the applicable capital markets over the period analyzed. Asset values represent the estimated value; if the assets were liquidated, additional capital gains or losses would be realized that are not reflected here. **Real estate is assumed to increase at the median inflation rate: 2.6% over the next 20 years. ***Required trust funding at year 20 is the amount of money the trust will need to be funded with such that it can support $100,000 of spending, after-taxes and inflation-adjusted, beginning in year 40 for 10 years, beginning in year 30 for 20 years or beginning in year 20 for 30 years with a 90% level of confidence. Assumes a moderate asset allocation of 60% global stocks and 40% bonds. Assumes top marginal Federal and California tax rates. Represents the total amount required to fully fund the SNT at a 90% level of confidence divided by the median value of Ellen s total estate. 33

35 Adding Equity Exposure May Help Grow the Estate and Therefore Decrease the Percentage Needed to Fund the SNT % of Total Estate Needed to Fully Fund the SNT* Current Allocation Scenario C 20/80 40/60 60/40 Scenario A 33% Scenario B 30% 27% 24% 48% 44% 39% 36% 16% 15% 13% 12% Spending Begins in 40 Years Spending Begins in 30 Years Spending Begins in 20 Years *Represents the total amount required to fully fund the SNT at a 90% level of confidence divided by the median value of Sharon s total estate. Required trust funding at year 10 is the amount of money the trust will need to be funded with such that it can support $100,000 of spending, after-taxes and inflation-adjusted, beginning in year 40 for 10 years, beginning in year 30 for 20 years or beginning in year 20 for 30 years with a 90% level of confidence. 20/80 means 20% globally diversified stocks and 80% bonds; 40/60 means 40% globally diversified stocks and 60% bonds; 60/40 means 60% globally diversified stocks and 40% bonds. Bonds are modeled as intermediate-term instate municipal bonds. Assumes top marginal Federal and California tax rates. Based on AB s estimates of the range of returns for the applicable capital markets over the periods analyzed. Data do not represent past performance and are not a promise of actual future results or a range of future results. See Notes on the Wealth Forecasting System in the appendix for further details. 34

36 SNT Funding Analysis It s a living, breathing analysis Should be updated the sooner of every 3-5 years OR whenever there is a material shift in family circumstances Change in medical needs Change in housing or caregiving assumptions Mortality (SN child, matriarch, patriarch, siblings) Change in finances (family fortunes, investment performance etc.) Change in family dynamic (marriage, divorce, grandchildren, etc.) Close communication with the estate planner to keep documents current 35

37 Do You Have Assets You Can Designate for Your SN Child? No <$100k Up to $500k or $1mm >$1mm Maximize government benefits Mix/match: 1. ABLE Account Carefully weigh pros and cons of (mix/match): 1. Third Party SNT Third Party SNT (possibly also an ABLE Account) 2. Pooled SNT 3. Family 2. ABLE Account 3. Pooled SNT 4. Family 36

38 Achieving a Better Life Experience Act: ABLE Accounts 529A established 12/19/14; now being implemented state-by-state After-tax contributions grow tax-free, qualified withdrawals are tax-free To qualify: disabled before age 26, on SSI or have a physician certificate Can pay for: Education Housing Transportation Therapies Legal/Professional fees Technology Support Services Health Key points: Beneficiary is the account holder; limit of one Can go out of state Maximum contribution from all sources: $14k/year $100k limit before disqualified from SSI *Medicaid clawback provision* Not a long term financial planning tool Nice for short term liquidity needs >$2k SSI limit 37

39 Common Mistakes / Misconceptions Thinking you don t need a SNT Thinking a Third Party SNT is too restrictive in expenses it can cover Thinking the ABLE Act is all you need Assuming family will take care of your child HNW/UHNW Confusing First vs. Third Party Having Medicaid clawback in Third Party SNT Failure to understand age limit on First vs. Third Party SNT Failure to plan beyond drafting the trust document Not giving any more thought to how to fund a SNT than % in trust document Failure to coordinate estate planning amongst family members Forgetting the importance of non-legal documents (esp. LOI) Forgetting to update retirement account beneficiaries Identifying the team of PEOPLE who will carry out your vision for your child Trustee, Trust Protector, Conservators, medical professionals, therapists, financial advisor, accountant, attorney, social worker, etc. 38

40 What do you PUT in the SNT? The Importance of Asset Location Taxable, liquid assets are the best: simple, ready source of liquidity Retirement accounts are not ideal Do NOT list the disabled person as a beneficiary Stretch treatment complicated to achieve Cleanest solution: just avoid them in SNTs All retirement accounts go to the non-disabled siblings or charities Higher share of taxable assets go to the SNT Real estate (any illiquid asset) is not ideal OK to leave if plan is to immediately sell, but otherwise it s not a liquid asset Beneficiary can own a house directly (primary residence is not a countable asset), but this may not be appropriate both from an asset protection and a practical standpoint What if it s the SN BEN s primary residence? Legal: Beneficiary deemed to have in-kind income during the month the trust buys the house (corresponding reduction in SSI) SSI: Rent must be paid to the SNT or you risk it being deemed a gift; any payments from the SNT associated with shelter (e.g. utilities) reduce SSI unless SSI pays for it 39

41 Planning Considerations at Different Ages Birth to age years Retired/elderly parents 1. Special Needs Trust 2. Letter of Intent 3. ABLE Account 4. Key Government Programs: Regional Center MediCal IHSS 1. Limited Conservatorship 2. SSI 3 year lookback Start planning at age 14 Apply at age Government Programs: Department of Rehabilitation Consult with Jim Huyck! 1. Review and update Retirement plans Insurance coverage Legal documents Fiduciary appointments 2. SS: Childhood Disability Benefits 50% of parent s SS benefit while they are alive, 75% after they pass 40

42 Choosing a Special Needs Trustee It s a complicated role Invest the assets Evaluate requested distributions, impact on government benefits File taxes Perform record-keeping Interact with social services agencies Be aware of changing special needs laws and regulations Choices Family member Is anyone skilled enough, with capacity, to do this role? May be uncomfortable being the gatekeeper Another option: co-trustee or trust protector Private Fiduciary Can be hands-on, but what about longevity? Corporate Trustee Future continuity, credit card 41

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