Case Study Series: Special Needs Planning and Asset Protection

Posted by Justin C. Duft, JD, CFP, CLU, ChFC, CLTC

June 21, 2017 at 1:30 PM

special needs planningIn today post, we’ll continue our case study series, showcasing the many creative solutions you can take when you’ve landed clients with complex planning issues. Here, we’ll explore the importance of special needs planning and asset protection.

We introduced your new clients, the Thompsons, in yesterday’s post. Here’s what else you need to know about their planning priorities:

A key issue for the Thompsons is providing support to their granddaughter, Ally, who was born with significant disabilities. Ally’s parents (the Thompsons' daughter, Katherine, and her husband) currently have a lot of support through programs funded by their hometown of Brookline. But once Ally reaches adulthood, she likely won’t be able to live independently without assistance from caregivers. While they are living, the Thompsons plan on helping with Ally’s financial needs through gifts to her parents. But they’re most concerned about relieving the financial burden after they are gone and ensuring that Ally is supported when her parents have passed.

Potential Solutions

Gifting strategies. A good place to start the discussion is with gifting strategies. You could explain that gift tax rules make an exception for expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, as well as for medical insurance on behalf of an individual. This exemption may give the Thompsons more flexibility in a year when they make larger gifts to Ally’s parents, helping to keep them under the annual exclusion amounts. It could also be important if they decide to fund a life insurance trust with Crummey provisions. If they gift premium dollars to the trust, and daughter Katherine is a beneficiary, they might exhaust their annual exclusion amount for gifts to Katherine.

Funding longer-term care needs. The second, and more pressing, issue is planning for Ally’s continued care. Ally’s condition does not compromise her life expectancy, so you have to assume that she will outlive her grandparents and parents. Also, because the Thompsons plan to make gifts during their lifetime to meet her support needs, it makes sense to talk to them about testamentary planning.

A special needs trust could help support Ally without interfering with state and federal aid. The trust should contain language that essentially makes the available assistance programs primary payers for her support needs. Almost all programs have an asset and income test, so the special needs language would need to shield the trust assets from being considered countable in the formula.

An attorney specializing in this type of planning would understand the programs available to Ally and could craft the trust language in a way that prevents it from interfering with program availability. Before meeting with a trusted attorney, though, encourage the Thompsons to consider these important questions: 

  • How much money will they use to fund the trust? Quantifying the funds required for Ally’s care will require some thought on the Thompsons’ part and likely a conversation with their daughter. Because they are projected to have a large estate at death, they are in a position to carve off a piece to fund a special needs trust.
  • Who will they name as trustee? The special needs trustee is tasked with understanding aid programs and how distributions from the trust will affect the testing requirements. This could be particularly difficult for a family member who lacks deep knowledge of the programs. You can take this opportunity to outline for the Thompsons the benefits of using a corporate trustee with a special needs focus. This option may give the Thompsons the peace of mind they are looking for.

Asset Protection

Now let’s turn to another issue that is not atypical for a wealthy family: asset protection. 

Janice and Ed both like Katherine’s husband, but they see signs of trouble on the horizon. The financial burden of Ally’s care has taken its toll on his and Katherine’s marriage. Although they are hoping for the best, the Thompsons want to take steps to ensure that any money inherited by Katherine is protected in the event of a divorce.

Like many parents, the Thompsons worked hard for their money and want to safeguard it for their children. This is another opportunity for you to educate the Thompsons—this time, on using a trust to protect assets from their children’s creditors or in case of a divorce.

The irrevocable trust. You suggest that, when the second of the Thompsons passes, each child’s share of the estate be distributed to an irrevocable trust, rather than to the children directly. The trust can be drafted with language that protects assets from creditors and even from a spouse in the event of divorce. You should stress that this approach would limit their children’s control over the assets. If they are truly concerned with these issues, however, irrevocable trusts are a good option.

Trustee selection will also be an important consideration, requiring some serious thought on the Thompsons’ part. Their attorney will be able to discuss these issues in detail and guide your clients in their decision making.

Start with Current Documents

Estate planning typically isn’t the first topic that you discuss with your clients. Nonetheless, it should be an essential part of the fact-finding process. Be sure to ask your clients for copies of their wills, trusts, and powers of attorney when you’re collecting their other financial documents. By doing so, and using some of the strategies discussed here, you will be well positioned to have an educated conversation with clients about their current estate plan and future goals.

Do you discuss estate planning with your clients? What other asset protection strategies do you recommend? Please share your thoughts with us below!

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

An Estate Planning Blueprint for Financial Advisors

Topics: Estate Planning

New Call-to-action
The Independent Market Observer, Brad McMillan

Follow Us