Securing Your Child's Future Is an Extended Family Matter

A grandparent, aunt, or close friend of the family has written a generous check to your child with special needs or has named the child in a will or trust. Should you be pleased?

Initially, you might be grateful for the assistance. After all, setting aside sufficient funds for your child's lifetime support is no easy task. But if your child receives public benefits, such as Supplemental Security Income (SSI) and Medicaid, the well-intentioned gift or bequest could do far more harm than good. That's because SSI eligibility is limited to those with no more than $2,000 in assets (excluding certain items such as a home or car). If your child receives a gift or inheritance in excess of that amount, he or she could lose public benefits, be forced to use the funds for basic expenses otherwise covered by SSI, and have to reapply for benefits when the funds are depleted, at which time SSI would become the sole means of support.

Fortunately, this doesn't mean grandparents and other interested parties must simply disinherit your child. Depending on how you have planned for your child's future, for example, whether you have established a Special Needs Trust (SNT) to supplement public benefits, friends and family members can provide assistance in a number of ways. A special needs attorney and financial advisor with special needs expertise can help them choose from the following:

• Making a bequest to the child's SNT. A grandparent or other interested party can name the SNT in his or her will or trust. Similarly, the SNT can be named as a beneficiary of the individual's life insurance policy, annuity, or 401(k) plan.
• Gifting assets to parents. Gifts may be made to you to help cover premiums on a life insurance policy that will fund your child's SNT. Such gifts are gift-tax-free provided they do not exceed the annual gift-tax exclusion.
• Gifting assets to the SNT. If the SNT is established as a living trust, individuals can gift funds to the trust during their lifetime. The gift must be treated as a "future-value interest," however, to avoid jeopardizing the child's benefits eligibility. This means that the donor must be willing to forego the gift-tax exclusion and either pay the gift tax or have the gift count against his or her unified credit exemption.
• Purchasing items for the child. It also is possible for someone to purchase items your child wants or needs. But, if your child already receives SSI, purchases must be approved by the SNT trustee to ensure they are not for items covered by SSI and that funds go directly to the purveyor of goods or services.

If your child receives a gift or inheritance directly

If you learn too late that someone has provided your child with a gift or taken inappropriate estate-planning steps, contact your special needs attorney to find out what may be done to redress the situation. This is important if a grandparent, other relative or friend does any of the following:

• Provides your child with a cash gift or deposits funds into a UGMA or UTMA (Uniform Gift or Transfer to Minors Act) account in the child's name
• Names your child in a will
• Establishes a trust for your child that does not meet the standard of being an SNT
• Names your child as a beneficiary of a life insurance policy or annuity

What your attorney advises will depend on a number of factors. For example:

• If your child is a minor and has not yet applied for SSI, any funds received through a gift or bequest should be spent down for your child's needs before he or she reaches legal age. This should prevent the gift or bequest from affecting the child's eligibility for benefits. Note, however, that use of the funds may be monitored by the courts, which can require that a guardian or parent be bonded, obtain prior approval before making certain purchases, and make periodic accountings of expenditures.
• If your child receives a gift or inheritance after reaching legal age and qualifying for SSI, and this results in the child's assets exceeding $2,000, benefits will be suspended unless a self-settled trust is created (as described below). Your child will be required to use the funds to pay for housing, day treatment and/or other needs, which can be quite expensive, and to reapply for public benefits once funds are depleted.
• If your child receives a substantial gift or inheritance, it may be possible to establish a self-settled SNT and transfer the funds to the trust. A self-settled SNT, used when an SSI recipient has his or her own assets, can help avoid the potential crisis described above. But self-settled SNTs must provide for repayment to Medicaid and other government agencies upon the child's death.
• If funds have not yet passed to your child and the benefactor is alive, explain the urgency of amending the will or trust so that property or other assets go to an SNT.

Seeking advice from special needs professionals early on can help everyone involved in your child's life avoid devastating mistakes, choose appropriate wealth transfer strategies and, potentially, even realize tax benefits. Most importantly, coordinating estate planning efforts with the whole family can help maximize the funds available to enhance and enrich your child's life.