Estate Planning for People with Disabilities
by Evan J. Krame

   

    Planning for one’s future and transfer of wealth is important to persons with disabilities.  People with physical and mental challenges have estate planning needs just as other citizens do.  There are special opportunities and challenges that require additional guidance and skill, not always available from the average attorney, accountant or financial advisor.  An exploration of some key topics can serve as a roadmap to the possibilities of planning for persons with disabilities.

    In the realm of estate planning generally, there is a need to address three general sets of powers: the power to make health care decisions, the power to make financial decisions, and the power to make distribution of an estate upon death.  Each of these decisions can be guided by four general concerns that every person should address when formulating an estate plan: protect our assets, plan for disability, minimize taxes, and reduce the costs of probate incurred upon death.  Obviously, the emphasis on these four concerns shifts according to the physical and financial status of the client.  However, none should be ignored.

    The professional advisor will provide guidance toward the successful completion of documents that suits the client’s goals.  That advisor also has practical and ethical concerns that may be highlighted when assisting a client with disabilities.
    
    The capacity of the client is the critical threshold question that confronts the professional working with a client with a disability to formulate an estate plan.  Does the client have the mental capacity to make critical choices about health care, finances, and inheritances?  The standards under the law are not terribly onerous.

    For example, the common law standard for executing a will required only that the client (testator) knows “the objects of their bounty.”  In other words, the standard to prepare a valid will is that the testator (male) or testatrix (woman) knows what they own and who they want to give it to.  In addition, a will is valid if the testator or testatrix has attained the age of 18 and the will is signed by at least two witnesses over age 18.  There are generally no other requirements for a will to be valid.

    Similarly, there are simple standards for the execution of documents that address the clients’ status while alive; namely, the durable financial power of attorney and the health care power of attorney.  A power of attorney will typically be found valid if the client exhibits a general understanding of the import of the document they are signing.  In these cases, an understanding that an agent is being named to make financial and/or health care decisions for the signer is often sufficient.

    Physical impairments can be overcome to validly execute a will or other estate planning documents.  For example, if a person cannot physically sign their name, their assent and execution of the will can be recorded by affidavit and/or videography.  The testator or testatrix can also direct a third party to sign the will on their behalf.  The cautious attorney will often shy away from video taping a will signing if the client may be perceived to be of limited mental capacity in the limited context of the filming.  For example, a normally competent and lucid elderly client may get “stage fright” and not appear to be competent in a video even thought they had full mental capacity to execute a will.

    The validity of a will may be checked by judicial process if there is a later claim of fraud, duress or undue influence.  Absent evidence of these tortuous behaviors, there is little else that can set aside a will.  Accordingly, the execution of a will may be presented as an option to many persons with disabilities as a tool to guide the transfer of their assets upon their death.

    Persons with disabilities should be given the opportunity to execute basic estate planning documents to memorialize their choices for the management of their funds, administration of their health care and disposition of their estates, if they have capacity to do so.

    Perhaps this need is best highlighted in the context of a health care power of attorney.  Decisions about health care encompass a wide variety of needs, from psychiatric care to surgery to institutionalization.  To the extent that any individual can express their desires, families and society benefit from the knowledge of an individual’s health care directives.  Health care proxies can also extend to the issue of the right to die.  Sometimes drafted as a separate document, individuals may wish to have a living will to describe the kind of medical care they desire at the end of life.  In the context of persons with disabilities, these insights, directives and guiding principals are more than mere instructions.  They create a legacy of how the individual perceived their life and their treatment as a valued human being.

    As is commonly the case, the most challenging issue is the choice of a fiduciary – the person to make decisions as an agent.  In this context, the agent under a power of attorney should have the sensitivity and knowledge to effectively execute their powers on behalf of a person with disabilities.  The emotional choice is typically to name a close family member.  However, blood ties do not always serve as the best requisite for serving as a fiduciary.  While going outside of family presents a wider variety of choices, the skills of non-family members must be balanced against the sense of obligation held by family members.

    Persons who do not have the capacity to appoint an agent under a power of attorney will often require the appointment of a guardian by a court of local jurisdiction.  In some cases, a guardian will be required even where a power of attorney has previously been executed.  The appointment of a guardian might be necessitated by the failure of the power of attorney document to address contingencies or by a family dispute.  In most cases and under the law of most states, the agent named in an existing power of attorney will be honored by the Courts appointing a guardian. See e.g. IN RE MOLLIE ORSHANSKY; DISTRICT OF COLUMBIA COURT OF APPEALS, 804 A.2d 1077; 2002 D.C. App. LEXIS 488 (2002).

    The need for estate planning expands beyond these common tools when a person with disabilities simultaneously seeks to control their own assets while qualifying for public benefits.  Many persons with disabilities are eligible for public benefits, typically Medicaid and Supplemental Security Income (SSI).  Eligibility is jeopardized when a person has substantial income and/or assets available to them.  For example, in most states a single person is not eligible for Medicaid if they have assets in excess of $2,500.  Currently, income in excess of $623 will generally disqualify a person with a disability from receiving SSI payments.  On the surface, our American legal system appears to force poverty upon persons with disabilities before affording them public benefits to provide health care and a subsistence income.

    Persons with disabilities are not by definition impoverished.  They may have assets or acquire assets.  In these cases, the planning focuses on the use of special needs trusts.  A Special Needs Trust is a planning tool to benefit people who receive government benefits. This type of trust preserves eligibility for government benefits and establishes a separate fund that can pay for things over and above basic needs that improve the beneficiary's quality of life.

    Persons with disabilities due to receive an inheritance or recovery as a result of litigation may have those funds directed to a special needs trust, thereby protecting eligibility for government benefits.  These are called self-settled trusts and are authorized by provision of the Social Security Act [42 U.S.C. '1396p(d)(4)(A)]; often also referred to as “d4A” trusts.  Such trusts must be funded with assets of the individual (who is known as the grantor of the trust), when the individual is under the age of 65 and disabled according to the standards of the Social Security Act.  The trust is for the sole benefit of the grantor (who is also the beneficiary of the trust, and shall be referred to as beneficiary for the remainder of this article).  The trust may only be established by a parent, grandparent, legal guardian or a court.  The beneficiary may not serve as trustee and retains no power to direct the use or disbursement of the trust funds.  In exchange for the right to preserve an inheritance or recovery in tort, the government exacts a price.  At the termination of the trust upon the beneficiary’s death, the state that paid medical assistance on behalf of the beneficiary must be reimbursed.  Any funds remaining can be directed to other remainder beneficiaries such as family or friends of the beneficiary.

    With a Special Needs Trust, the assets are given to the trustee of the trust to be used for special needs.  Special needs include any goods and services that are not food or shelter. "Supplemental needs" is another term for special needs. Special needs include, but are not limited to, the following: clothing; transportation; telephone; education; cable television; private rehabilitative services; occupational or physical therapy; private case management; medical services for which there are no other funds available; health insurance premiums; dental care; medication and supplements; recreation and vacation;  computer equipment and services; personal care items and other services.  Although a home is defined as shelter, in most instances a special needs trust can own a home for the benefit of the beneficiary.

    Distributions from a Special Needs Trust are paid at the discretion of the trustee. It is important that the trustee directly pay the person or business providing the special need. The beneficiary is ordinarily not given cash with which to make an allowed purchase. This is because the cash could be used to purchase a prohibited item, such as a meal or item of clothing. Receipt of the cash must be reported to the government agency providing assistance, and benefits may be reduced or eliminated for a period of time. To avoid this, the trustee should pay directly for the item requested.

    There is a variation of the special needs trust that serves as an alternative for the receipt of a recovery or inheritance.  Pooled special needs trusts under 42 U.S.C. '1396p (d) (4) (C) allow for a collective approach to special needs trusts.  With a non-profit organization as the trustee, many different beneficiaries will be served by having their assets pooled with other beneficiaries but managed as separate shares.  The pooled trust offers several advantages when compared to the d4A self settled special needs trust.  There are no attorney’s fees to be paid to draft the trust.  Rather, there will be a small initiation fee or joinder fee.  The participants benefit from the existing pooled trust administration, typically staffed by knowledgeable and skillful professionals.  Because of the economies of the pooled trust, persons with assets of less than $500,000 will be better served by the pooled trust.

    There are other advantages of the pooled trust is that the individual may make the contribution directly, rather than having to rely upon a parent, grandparent, guardian or court.  Contributions to pooled trusts are not subject to the same age limitations as self settled special needs trusts.  Finally, at the death of the participant, the beneficiary’s share of the pooled trust will pass according to the guidelines and policies of the trust.  Such guidelines may limit the payback provision to the state Medicaid agency and even allow for some legacy to family or friends of the participant.  These advantages make the pooled special needs trust an attractive alternative for estate planning purposes.

    There is a third kind of trust that is typically grouped under the category of special needs trusts.  These are third party trusts.  They are funded not from the beneficiary’s assets but rather with funds provided from others, typically family members.  These trusts are characterized by the discretion granted the trustee.  In order to be excluded as an asset of the beneficiary so as not to jeopardize public benefits, the trustee must have the sole discretion over the disbursements from the trust.  The person with disabilities may make requests of the trustee but has no control over the disbursements or operation of the trust.  The trustee is also directed not to make disbursements from the trust which could interfere with the beneficiary’s eligibility for social security income and other benefits.  As the standards for maintaining SSI are very strict, disbursements of cash, purchases of food and the payment of the costs of shelter may all be counted as income to the beneficiary causing reduction or elimination of SSI benefits.

    Third party trusts are an estate planning tool that generally suits the family of a person with disabilities.  The funds are protected in the trust format, may be safe from the claims of creditors or state agencies, and yet provide for goods and services to maintain a better quality of life for the disabled beneficiary.   

    Persons with disabilities should not be discounted from engaging in an estate planning process.  Families and supporters should be engaged in the discussion as well.  Where the person with disabilities can make meaningful choices, all will be enriched by using these legal tools toward maintenance and protection.   

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Evan J. Krame is an attorney practicing in the fields of estate planning, trust administration, guardianships, probate, and tax planning. He is currently the president of Shared Horizons, Inc., a not-for-profit corporation which serves as trustee of a pooled special needs trust serving persons with disabilities in the District of Columbia and Maryland. He also holds positions with many other organizations including the National Disability Institute, the Advisory Board of Capital Bank, NA, the American Friends of the Anne Frank House, Hillel at George Washington University, CHI Centers, Inc., and more.