Recently a man called me with a question I often hear: "My mom just turned 70 and she doesn't have any estate planning done, but we've noticed her memory is not as good as it used to be. In fact, we are thinking about moving her in with us. What planning should we do now for her estate and for her long-term care?"
The answer depends on a lot of factors, but for this family it was not too late. The mother still had lucid periods lasting days or even whole weeks at a time. It was clear to me when I met her she could understand the situation and was capable of making informed decisions about her estate.
Another question posed by the financial advisors I work with: "My clients have a special needs child with severe autism. I am working with them on meeting their financial goals. Can you help them with their estate planning? We are concerned that their child may lose government benefits in the future."
The truth is that these issues are not far removed from our own households. How many financial advisors themselves are caring for elderly parents or special needs children? How many of your clients are caring for the elderly or the special needs young?
Look around, and you discover the odds are that a significant percentage of us will face some level of disability personally or in our close families at some point in our lives. And when a family deals with a mentally incapacitated member, it affects their financial planning and estate planning options in very specific ways. The parents of special needs children may have a difficult and complex task of planning for their child's basic needs even after the child is an adult and long after the parents have died.
I have confronted these same challenges myself both personally and professionally. Both my grandmother and father-in-law suffered from Alzheimer's, and I witnessed firsthand the ramifications of that disease for loved ones, their spouses and adult children caring for them. I am currently serving as the court-appointed conservator and guardian for an 83-year-old who suffers from both Alzheimer's and Parkinson's disease. I have also helped others deal with these issues in my law practice for the past 12 years, working regularly with families that have special needs children suffering from a range of mild to severe mental or physical disabilities.
The Disabled Population
The U.S. Census Bureau provided staggering data a year ago indicating that 40.9% of adults over the age of 65 are legally disabled. As used by the bureau, the term "disability" means a long-lasting physical, mental or emotional condition that impedes one's ability to do normal, typical daily activities or even leave the home. This includes someone who has a limited ability to walk, bathe or dress. Consider also the percentage of adults ages 21 to 64 who are disabled (12.9%) or children ages 5 to 20 (6.5%), and we realize there is a significant population of people requiring a lot of care and another population of people responsible for giving it.
The Incapacitated Population
Besides disability, our aging population and special needs children may also suffer from various levels of incapacity. Generally, this means impairment due to mental illness, mental deficiency or physical disability. Those suffering from it are unable to communicate decisions about their own care or finances.
Over the past three years, WealthCounsel, an estate planning attorney membership organization, has queried lawyers about their estate planning practices. In 2007, a study by the organization indicated that 9% of an estate planning attorney's practice dealt with spouses who were terminally ill and 7% dealt with families who had a special needs member. The following year, the numbers had jumped, with 18% of the attorney's practice being devoted to incapacitated or ill spouses and 10% to families with special needs members. These figures are going to continue increasing with the aging baby boomer population, and understanding these issues will help you in your business.
The Effect On The Advisor
To properly address all the financial and legal issues presented by potential or actual disabilities, estate planning attorneys and financial advisors must work hand in hand, and their work must be intertwined. Though it is the attorney who helps a client decide who manages her financial affairs during her lifetime if she becomes disabled or incapacitated, it is the financial advisor who confronts critical options such as long-term health care, private insurance and other financial management issues. The attorney/advisor team will also help clients focus on their personal care-on their medical decisions, on where they want to reside and whether they want nursing care.
The Durable General Power Of Attorney
One way for a client to anticipate the problems of becoming incapacitated is to authorize a third party to act as her durable general power of attorney, somebody to handle her financial and administrative tasks while she's still alive. Those with the power of attorney can handle items that are often forgotten but important to clients: pet care, for example, or the continuation of gifting and tithing to charities, churches and grandchildren. Her representative can also pay for family members to care for her in her own home rather than in a nursing home or hospital.
The Advance Directive/Health Care Power Of Attorney
With the Health Insurance Portability and Accountability Act of 1996 (commonly known as the HIPAA Privacy Rules), in effect, it is more important than ever for a client to establish an agent who can speak on her behalf when she can no longer speak for herself. The advance directive/health care power of attorney is the best document to help her handle those future medical affairs. In such a document, a client can specify ahead of time her end-of-life wishes-for example, whether she wants to stay on life support if she is terminally ill and in a persistent vegetative state, with no hope of recovery.
I have always found the medical directive to be more for the family members: It helps ease the conscience of a family member directed to "pull the plug" if that's what the patient specifically wants. The health care power of attorney is more general in nature and establishes an agent who can speak to health care professionals about a client's medical care. The cost to prepare a medical directive/health care power of attorney is relatively inexpensive, especially when you consider how it helps avoid the angst that would face grieving family members if no such document were in place.
The More Comprehensive Move: The Revocable Living Trust
The best document to have in place, one that addresses a host of issues for our aging, disabled and incapacitated population, is the revocable living trust. Any adult of sound mind capable of making contracts and performing civil duties may execute a trust. The revocable living trust allows competent clients to address several issues before they ever become incapacitated:
It allows them to make special arrangements for the distribution of assets to a disabled spouse, child or some other family member.
It allows them to transfer assets to a special needs trust, if applicable, to preserve important government benefits.
It allows them to make the proper designation of beneficiaries on retirement and investment accounts (typically, a spouse is selected as the primary beneficiary and the trust is named as the contingent beneficiary, but this is not always the case).
It names the person who will manage the client's financial world in case he or she becomes incapacitated or disabled.
* It allows the efficient transfer of assets to the family or charities.
A person would also consider preparing a revocable living trust to help herself with state and federal tax planning, to avoid probate (both the cost and the delay in the transfer of assets), to protect privacy, or to protect her ownership of out-of-state property or any interest or shares in a business.
The Special Needs Trust
For my clients with a special needs child, it is crucial that the financial advisor and I work closely together to identify funds for a special needs trust so that the client can avoid losing important government benefits for the child such as Medicaid, Supplemental Security Income, HUD rent subsidies and food stamp programs. We need to identify, as best as possible, whether the needs of the special needs person are primarily medical, behavioral or developmental in nature. Furthermore, we want to ensure that future distributions of income are not paid directly to the special needs person, but that the trustees pay service providers directly.
Also, we make sure to ask the simple but pointed question of whether any family member intends to send gifts to the special needs child. In other words, do grandma and grandpa want to distribute a portion of their estate to all of their grandchildren? If so, a discussion needs to include methods of estate planning that will allow the child to receive gifts without losing government benefits.
All too often, I have seen a special needs child listed as a beneficiary of a life insurance policy and most often this is a death knell to that child's government benefits, not to mention the fact that it also means opening a separate probate proceeding called "guardianship of a minor's estate." Never name a child as the beneficiary on any type of asset without first talking to an estate planning attorney.
All of these issues can be addressed with a revocable living trust (one with special needs language in it) or with a stand-alone supplemental or special needs trust. After the death of the grantor in the case of a revocable living trust, or immediately with the latter two types of trusts, the trustee has discretion over the assets for the care of the individual but has no obligation to make payments to the special needs beneficiary. Instead, the funds are used to pay for luxury or enrichment items-in other words, for items other than the basic needs of the individual. At first this concept stymies my clients, since they want the trust funds to pay for basic necessities rather than luxuries, but it is Medicaid that pays for the basic necessities. These trusts pay for everything else.
Special needs people can also benefit from community pooled trusts (public trusts comprising disabled individuals' funds managed by a nonprofit), especially if the individual is receiving a personal injury settlement or if the individual has no non-disabled relatives. Other options to consider are the irrevocable life insurance trust (especially if the family is in a tax bracket subject to federal estate tax) or the more simple option of designating a representative payee for Social Security payments.
The Last Resort: Conservatorship nd Guardianship
The last resort for your client if she is caring for a severely disabled or incapacitated person or a special needs child over the age of 18 is a formal conservatorship and guardianship process in which she simply takes legal responsibility for the incapacitated person. If her parents, say, have already reached a state where they can no longer make competent, responsible decisions about their own care or if she has a special needs child turning 18 without the necessary capacity for taking legal action, a conservatorship/guardianship action may be the only option. It is costly, since it requires court action, but it can give your client a long-term solution and peace of mind that someone responsible, competent and caring has discretion over the disabled person's assets and personal care.
Disability affects a large percentage of families. As trusted advisors, we need to work closely together to encourage our clients to discuss these topics with us. It can be a challenge, but it can also be rewarding for us both personally and professionally.
Lori K. Murphy is a shareholder in the law firm Bean, Kinney & Korman, PC in Arlington, Va. and focuses on estate planning and estate administration. Murphy's estate planning practice includes individual planning and business succession planning. She assists clients with wills, powers of attorney, living wills, living trusts and special needs trusts. Representative clients include individuals, couples, families with special needs and business owners.