Estate Planning Tools for Individuals With Disabilities, Mental Health Conditions or Addictions

Almost everyone can think of a relative or close friend who has a family member with a disability, mental health condition or addiction. Disabilities alone capture many individuals with learning or developmental issues, a physical limitation, or incapacity due to a disease, accident or other injuries. The National Center for Learning Disabilities estimates one in five children in the U.S. has learning or attention issues. The National Alliance on Mental Illness notes that approximately one in five adult Americans experiences some form of mental illness in a given year. Among the 20.2 million adults in the U.S. with a substance abuse issue, approximately half had a co-occurring mental illness (from a 2014 national survey).

These conditions are important considerations for families as they undertake estate planning. Fortunately, there are several planning tools available.

Special Needs Trust

Supplemental Needs Trust (SNT), also referred to as a Special Needs Trust, is the most common planning tool. Typically, the trust benefits an adult who is not fully independent and receives public assistance such as Social Security Disability Income, Medicare, Social Security Income, or Medicaid. The SNT provides supplemental support for the individual and is designed so the beneficiary doesn’t lose public assistance benefits. Important characteristics include:

  • An SNT is typically set up and funded by a third party, usually parents, grandparents or another relative.
  • An SNT does not have to be funded when it is set up. Often the parents’ or grandparents’ will directs the funding of the SNT.
  • Life insurance or investment assets are examples of assets that can fund an SNT.
  • More than one individual can contribute.

First Party SNT

A “First-Party Funded Trust” is established by a third party but is funded with the beneficiary’s assets. An important difference from the SNT funded by a third party is that remaining assets must first be used to pay back Medicaid benefits provided to the beneficiary over his lifetime. The grantor can name a beneficiary for residual assets. This kind of trust is also referred to as a Self-Settled (d)(4)(a) Trust.

Pooled Trusts

There are both first and third party pooled special needs trusts. A First Party Pooled Trust is the only type of SNT that allows the disabled individual to set up a trust for their own benefit, according to the Special Needs Alliance. In Connecticut, the only organization that can administer such a Trust is PLAN of CT. Additionally, the PLAN Pooled Trust is the only trust in CT that can be used by a disabled individual over 65, according to their website. Remaining assets must first be used to pay back the benefits provided by the state(s). Third party pooled trusts are set up by a third party such as parents, grandparents or other relatives.

Pooled trusts can be an alternative for families with limited resources offering professional administration and management at a more reasonable cost compared to a stand-alone trust. Moreover, acting as a Trustee of a SNT involves many responsibilities. Some families may choose the pooled trust option if they have difficulty identifying a suitable individual to serve as trustee or where continuity could be an issue.

There are nuances from state to state in the rules for pooled trusts, so be sure to check your specific state’s requirements.

Conservatorships

Conservatorships (also called Guardianships) are another option. A conservator is someone appointed or selected by the Probate Court to make legal decisions for someone who is incapacitated or disabled. They can be for children or adults, temporary or permanent. There can be a conservator for the person, which involves the care of health and basic needs, or the estate, meaning their financial assets, or both. A conservatorship can be entered into voluntarily or involuntarily. There are typically reporting requirements to the Probate Court.

Considerations for Those Suffering from Addiction

Specific language, called the “sole, absolute and uncontrolled” discretion standard, may be included in a trust set up for a beneficiary with a known addiction problem. Typically trusts have language that guides the trustee as to what purposes distributions can be made for such as education, health, and maintenance support. With the absolute standard, the trustee has much wider latitude to say no to distributions. There are pros and cons of using this type of language which should be discussed with your attorney and considered carefully.

For families faced with a loved one with a disability, mental health condition or addiction, these can be powerful tools in the estate planning process. Each is specialized and complicated, and should be discussed in greater detail with your personal estate planning attorney.

Valerie Connolly, CFA

Valerie joined HTG in 2011 as a senior advisor. Drawing on 30 years of experience in financial services, she greatly enjoys collaborating with clients to shape their financial aspirations. Valerie takes a lead role in developing client investment plans, researching investment vehicles and developing firm-wide investment policy.

Valerie received a BA from Wellesley College and an MBA from University of Chicago. She is a CFA® charterholder and a member of the CFA Institute and CFA Society Stamford.