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This post was updated on March 30, 2022
Estate planning is never easy. Contemplating end-of-life decisions and inheritance questions can be legally and emotionally complex. Unfortunately, estate planning for a family member with special needs can make the process even more difficult.
But there are ways to simplify estate planning for people with special needs. And knowing what to expect, including the potential perks and pitfalls, is the best way to start.
One way to reduce estate taxes and pass on family wealth is by taking advantage of the annual gift exclusion. You can make a gift of up to $13,000 per year completely tax-free, and the person you give the gift to does not need to provide you with any kind of compensation for the gift. If you start payments early enough, you can pass along a substantial amount of tax-free money to beneficiaries before death.
These kinds of gifts can become complicated for loved ones with special needs who need to qualify for means-tested government benefits like Social Security or Medicaid. Even leaving a lump sum to a beneficiary with special needs could affect their Social Security or Medicaid eligibility. You can avoid this problem by setting up a special needs trust.
A trust is property managed by one person for another person's benefit. A special needs trust is specifically for the benefit of a beneficiary who cannot manage their own finances. You can create it with the beneficiary's specific needs, lifestyle, and future in mind. Generally, money secured in a special needs trust won't affect the beneficiary's eligibility for Social Security or Medicaid benefits.
A special needs trust can also limit your estate taxes and help you avoid the probate process. The probate process can be long and take months or sometimes years to resolve. And, the longer it takes, the more it will cost, leaving potential special needs heirs with less than you intended.
By setting up a special needs trust early, the property you add to the trust is no longer a part of your estate, allowing you to avoid the probate process entirely. And, as noted above, a special needs trust can avoid some inheritance taxes. Estate tax rates and their applicability can vary by state, so make sure you're familiar with estate tax laws in your state.
Many people with special needs have additional health concerns and may or may not be able to make health care decisions for themselves. In this case, it may be wise to also set up a living will and a health care directive.
You can think of a living will as Plan A. It's a document that sets out how a person wants to be cared for in an emergency or if they are incapacitated. A living will can be a special needs person's primary health care directive, so the document should be as specific as possible.
No living will, no matter how specific, can account for every outcome, so that's where the health care directive, or Plan B, comes in. This can grant authority to the person who a person with special needs wants to make medical decisions for them in an emergency. It's essential to designate a person who has the power to make health care decisions on behalf of a person with special needs, decisions that may not be covered by the living will.
Sadly, many people with special needs are also susceptible to manipulation and undue influence when it comes to estate planning. Undue influence occurs when a weak or vulnerable person gets taken advantage of in a transaction. People with special needs who stand to inherit large estates are often targets of undue influence.
Undue influence can be the basis to challenge a will or other estate planning document. If proven, it can lead a judge to invalidate a will, but it can be difficult to prove, and courts often enforce wills without extensive analysis. This is all the more reason to dedicate time and effort to estate planning for a loved one with special needs early, so that someone with inappropriate influence cannot make these decisions later.
Deciding which estate planning tools to use will depend on your particular set of circumstances, including the value of your estate, your marital and family status, and your real estate and business assets. And a qualified estate planning attorney can help you choose the right tools.
If you would like to set up a special needs trust, an estate planning attorney can customize wills and trusts for special needs beneficiaries, help them avoid estate and probate taxes, and update an estate plan based on the latest laws.
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