Estate Planning for Children with Special Needs

Planning an estate for the benefit of a child with special needs comes with its own unique challenges. What do you do when a trust’s beneficiary may never be fully able to manage their own affairs?

Vincent Chok Published by Vincent Chok on 27 August 2019 (Updated 9 December 2019)

Planning for a child with special needs can include advising caregivers of your wishes and preparing your estate for after you’re not around. As children with special needs grow to adulthood, it can become necessary to seek authorization to make financial and medical decisions on their behalf. And the financial impact can be considerable.

Trust and custody professionals will work with you to plan a bequest that preserves public benefits for the child while preserving the child’s safety and financial security and enhancing the child’s quality of life. This type of planning should look at:

  • Lifetime money management for the benefit of the disabled child
  • Protecting the disabled child’s eligibility for public assistance.
  • Ensuring funding for the future, in which public funding may cease or be restricted.

Special needs vary, and some children with special needs will grow into successful professional careers, while others will need extensive lifelong support. So it’s crucial to consider these factors carefully before committing to a course of action.

Estate planning options

There are several estate planning options for children with special needs. These include:

Disinheriting the child

While this is the simplest option, it leaves the child without the funds they may need to lead a fulfilling life.

Leave the estate to the child’s brothers and sisters

At the parents’ death, their entire estate is distributed among the child’s siblings on the understanding that they will look out for the child’s wellbeing. There are inherent risks in such an approach, including claims by the siblings’ creditors, mismanagement of funds, divorce, bankruptcy, and other financial issues. Siblings also may not wish this responsibility or be well-suited to discharging it, and of course some children have no siblings. This approach works best when only modest sums are at issue.

Leave an inheritance to the child

This is many parents’ initial preference. However, the child may not currently, or may never be, fully able to manage their own financial affairs. Additionally, being in possession of their own resources is likely to render the child ineligible for public assistance including Medicaid in the US, for instance. Once these considerations are raised, many parents turn their attention to the possibilities of some sort of trust arrangement.

Place the inheritance in a special needs trust (SNT)

There are some trust vehicles specifically designed for children with special needs. Later in this post we’ll explore two, the American Supplementary Needs Trust and the Hong Kong Special Needs Trust. While these appear initially to be the perfect solution, each is in its own way sufficiently restrictive that they don’t suit the purposes of many parents.

Place the inheritance in a custom trust

Hong Kong allows the creation of custom trusts within very broad parameters. Creating a trust like this is the best way for parents to secure the financial security and future wellbeing of their children, and such trusts can be established and operated in Hong Kong even by settlors and for beneficiaries who do not reside in Hong Kong.

First, let’s discuss the trust vehicle explicitly designed for this scenario, the Supplemental Needs Trust.

The USA’s Supplemental Needs Trust: a trust vehicle for children with special needs

In the USA, the most-used instrument for estate planning for children with special needs is a ‘Supplemental Needs Trust,’ which differs from other trust vehicles in that its primary purpose is to protect the child’s access to benefits in adulthood.

While in most cases trusts are intended to protect a family’s estate, SNTs are useful even if the bequest in question is relatively small. For instance, a bequest of just $2,001 could render an adult with special needs ineligible for both SSI disability payments and Medicaid. The loss of the monthly $733 from SSI might be affordable, but without Medicaid, medical costs can spiral. However, the most typical SNT use case is when there’s a bequest including compensation payments as well as inheritance.

How do you set up a Supplementary Needs Trust?

SNTs are governed by complex rules in the United States. Creating a trust that’s compliant with these rules and also reflects the beneficiary’s sometimes-complex or evolving needs is a specialist task, which means it’s best done in partnership with a financial advisor.

This is best done by a family member rather than by the beneficiary themselves; although there is regulatory provision for self-settled SNTs, they are much less advantageous: for example, they must contain a provision for repayment of Medicaid when the beneficiary passes. In most cases it’s best to avoid putting the beneficiary’s own property (personal injury payments, inheritance from other relatives) into the SNT. This could cause the trust’s assets to be viewed as the beneficiary’s resource: the trust would then itself render the beneficiary ineligible for public assistance such as Medicaid, defeating the point of the trust.

Living or testamentary trusts

Supplementary needs trusts can be set up during the settlor’s lifetime, or created at their death as a part of their last will and testament, known as a testamentary trust. Testamentary trusts are less-preferred, since they:

  • Go through probate
  • Cannot include assets settled by parties other than the parents (for instance, grandparents)
  • Can be a surprise for any named co-trustees

By contrast, inter vivos or living trusts provide protection against all these: there’s no probate, assets can be settled by multiple parties, and co-trustees can gain experience in operating the trust before its full function becomes vital on the parents’ death.

Trusts and probate

One of the major appeals of a trust is that it removes the requirement for probate. Probate is the process whereby the law acknowledges that ownership of assets has passed from one person to another, following the death of the previous owner. During probate, assets are made public and valued and death duties are charged. For families who prefer privacy, trusts allow the passage of beneficial ownership without probate. (For more on this, read How Is a Trust Different from a Will)

Revocable and irrevocable trusts

Revocable trusts are trusts in which assets settled on the trust can be recovered by the original owners. Irrevocable trusts do not permit this. As a result the two forms offer very different protections, though both are available within the SNT framework.

Revocable trusts are usually selected when the family wishes to retain the maximal possible control over the trust, and where income tax is not a concern. This form of trust does not achieve the permanent alienation of assets required to avoid paying taxes on income derived from them.

Irrevocable trusts are selected when families are concerned with income tax reduction and when the assets being placed in trust exceed a million dollars in value, at which point they become liable for federal gift and estate taxes.

What can’t you use an SNT for?

It’s important to note that, except in special circumstances, a Supplemental Needs Trust cannot be used to pay for:

  • Cash given directly to the beneficiary for any purpose
  • Food or groceries
  • Meals at restaurants, except occasionally as a gift
  • Rent or mortgage payments
  • Property taxes
  • Homeowners’ or condo association dues
  • Home insurance if the insurance is a mortgage requirement
  • Utilities like gas, electricity or water
  • Utilities connection charges

It will be seen from this list that a SNT is not the appropriate vehicle to leave a child with special needs money to live on, since all the standard living requirements, notably cash money, food, utilities and residence or property, are explicitly excluded.

Hong Kong: The Special Needs Trust

Hong Kong’s Special Needs Trust is administered by the Special Needs Trust Office, established in 2018 to ‘provide reliable and affordable trust services.’ The trustee of a Special Needs Trust is the Director of Social Welfare Incorporated, and the trust arranges that regular disbursements be made to the carers (individuals or organizations) of children who have special needs and whose parents are deceased, in accordance with the parents’ wishes. This is to ensure that the parents’ assets are used to meet the long-term daily needs of their surviving children.

There are eligibility criteria for both settlors and beneficiaries.

Settlors must:

  • Be a parent or relative of a person with special needs
  • Be aged 18 or above
  • Not be an undischarged bankrupt at the time they sign the Trust Deed
  • Be a permanent resident in Hong Kong

Obviously, this trust vehicle is therefore of little utility to people who live outside Hong Kong, though in other ways the settlors’ eligibility criteria are quite liberal.

Beneficiaries must:

  • Be a person with an intellectual disability (including Down’s syndrome), a mental disorder, or autism
  • Be eligible for rehabilitation services subsidized by the Social Welfare Department or for admission to special school by the Education Bureau
  • Be a Hong Kong permanent resident who ordinarily resides in Hong Kong

Clearly these criteria are sufficiently restrictive as to make it clear that a Special Needs Trust is part of Hong Kong’s welfare services, rather than a financial tool with a wider constituency.

So, faced with strict residence criteria in Hong Kong and strict functionality specifications in the United States, how should the parents of children with special needs address estate planning? Fortunately there are excellent alternatives to an SNT.

Alternatives to an SNT

Trusts set up in Hong Kong can be more open-ended than those established in other jurisdictions. They can operate in perpetuity, rather than for a fixed period; local heirship laws don’t apply, meaning full discretion for the settler; and trust vehicles can be crafted by finance professionals in an environment that combines professionalism and regulatory oversight with maximal leeway to create exactly the trust you need.

While there’s a specific trust vehicle in Hong Kong that’s designed for children with special needs, called the Special Needs Trust, it exists for social welfare reasons, applies only to Hong Kong residents and has the Hong Kong Director of Social Welfare as its trustee; it doesn’t impinge on your right to set up your own private trust in Hong Kong.

Considerations when setting up a trust for a child with special needs

Here are some things to think about when you’re discussing your trust with your financial advisor:

Government benefits

Depending on your location, a person’s income or assets might be used as the criteria for eligibility for a range of benefits, including housing, income support and medical care. Will the child need benefits into adulthood?

Who will be trustee?

Trustees should be selected carefully. While a family member can co-trustee, the main trustee should be a professional with experience in this area.

The trustee will be the person responsible for administering your trust, so selecting the trustee is one of the most important decisions you will make for your child’s future wellbeing. Family members may be the first to come to mind, but a trust works best when it is operated by a professional who both understands the financial and professional landscape, and is able fully to separate their business from that of the trust. If a family member is to operate the trust it is best if they are a co-trustee and the final decision should rest with a professional licensed trustee.

Options for co-trustees include:

  • Parents, siblings or other distant relatives
  • Your personal or family attorney
  • A non-profit organization, particularly one with experience in this area
  • A financial institution
  • A trust company

Parents should seek professional advice before selecting a trustee.

The child’s living arrangements

How is the child expected to live in adulthood? Location, degree of independence and additional needs should all be considered, as should the possibility that the child’s needs will change over time.

Documents and additional arrangements

Setting up the trust will likely be part of a wider plan for the child’s future, and integrating and managing it into the broader care plan may require arranging powers over financial, medical and legal matters which will require regulatory approval and documentary support. This is one reason why financial planning should form part of a wider estate-planning conversation.

If you’d like to know more about setting up your own trust for a child with special needs, Legacy Trust Company has decades of experience in the Hong Kong trust and fiduciary industry and would be pleased to talk with you or your advisor.

Disclaimer:

Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.

Insights and industry perspectives delivered to your inbox

Subscribe to our newsletter for news updates and useful resources. You can unsubscribe with one click at any time, but we don't think you would want to.