Deciding how to leave your assets to your kids is tricky enough. If your adult child has a chronic disability, the task is much more complicated.
The issue affects many families: According to U.S. Census data, 12% of the population has a severe mental or physical disability.
Strapped state and local governments are tightening income restrictions for medical benefits and supportive services, which are typically paid for by Social Security and Medicaid. Those services are tough to find—or afford—in the private sector for many adults with disabilities so severe that they can't live alone, parents and advocates say.
As a result, it's increasingly important to structure an inheritance in a way that won't disqualify a child for such benefits down the road.
At the same time, government and nonprofit funding to programs providing group housing isn't keeping up with demand from adults with disabilities, whose life expectancies are increasing. To meet the demand as of two years ago, the U.S. would need to expand the residential-services capacity for people with intellectual and developmental disabilities by 28%, according to a University of Minnesota report.
Making matters worse, two-thirds of parents and caregivers don't have a plan for where the person they support will live when the caregiver gets older, according to a June survey of families and caregivers by Arc, an advocacy group.
Here are some tips on how families can prepare.
• Housing. Some families pair up to pool their resources and provide a home for two disabled adults, using a trust to make sure the mortgage and taxes are paid and the house is maintained, says Deidre Wachbrit Braverman, an estate-planning lawyer in Westlake Village, Calif. Other options: creating a housing collective after the parents' deaths somewhere with less restrictive zoning, or leaving the family home to a nonprofit that could turn it into a group home.
Paul Harvey, the father of an adult son with a developmental disability in Orange County, Calif., is brainstorming solutions with a group of other parents. One possibility: a "qualified personal residence trust," or QPRT, which lets homeowners stay in a house for years before transferring ownership to an heir at a discount to the current market value. That way, the families can give their homes to a charity or to another family member to manage for the child's lifetime use, Mr. Harvey says.
Another option: a "special needs" trust—a vehicle in which parents can put assets for the child's benefit without endangering government benefits. That would be a safer bet, says Ms. Braverman, since with a QPRT, changes in state law might cause the house to be counted as an asset for Medicaid purposes, disqualifying the child from benefits.
Families wealthy enough to leave a home to their child should consider a special-needs trust, Ms. Braverman says. Such trusts typically cost $2,500 to $5,000 to set up, says Harry Margolis, a Boston attorney who handles special-needs and elder-care cases.
Because the requirements for government-supported benefits are so exacting, it's important to have your attorney research the specific income and asset requirements when you draft such a trust, Mr. Margolis says. He recommends naming co-trustees: One professional, such as a lawyer or a financial institution, along with one family member.
• Long-term care. Special-needs trusts are particularly helpful if a parent needs long-term care and the child is younger than 65, says Mr. Margolis: "The parent can shelter assets and qualify for Medicaid coverage by putting everything in the trust for the child with special needs."
It's an increasingly common situation, he says. Typically, when older adults who need long-term care seek Medicaid to help pay for it, there's what's called a "look back" period, meaning officials count any gifts made by the patient within the previous five years as assets that can be counted when calculating what they can pay for long-term care before Medicaid kicks in.
But assets in a special-needs trust aren't counted as being available to the parent.
• Inheritance. To avoid disqualifying an adult child from getting services, some parents simply leave another child all their assets in their will. If there are three children, they might leave two-thirds to the child who lives closest to the one with special needs.
Still, problems could fester. "The local child is going to feel increasingly resentful of the sibling who isn't pitching in," Mr. Margolis says.
What's more, if the caregiver gets divorced or dies, that money could go to the ex-spouse or their children.
One fix: Give each child an equal share, and put the special-needs child's share in a trust. But given the increasingly unpredictable nature of most investments, you could further fund the trust with a permanent life insurance policy, he suggests.
Two websites list lawyers who specialize in working with families with children with disabilities: specialneedsanswers.com and specialneedsalliance.com, which also lists financial-services companies with practices focused on special-needs planning under the "Resources" tab.
By, Kelly Greene
