Providing for a Disabled Child

Government benefits are often essential for the continued well-being of a disabled child after the parents’ death. Even for parents who might be able to afford large insurance policies (or have other assets to care for the child), the preservation of government benefits can substantially decrease the costs of care over the lifetime of the child. In addition, some social service programs are accessible only through government programs.

Most government benefits, including Medicaid, are available only to those who have no substantial assets or income. The parent’s dilemma is how to ensure their child has adequate resources while not rendering the child ineligible for Medicaid and other government programs.

One solution is to place assets for the benefit of a disabled child in a “wholly discretionary trust.” A wholly discretionary trust names the disabled child as its beneficiary but does not provide any standards for how or when the money is to be used for the child, giving complete discretion to the trustee. A recent Ohio Supreme Court decision, rendered on January 17, 2008, affirms the use of wholly discretionary trusts as effective means of preserving Medicaid eligibility for disabled children.

Other options for parents have significant disadvantages. Some parents leave all of their assets at death to their non-disabled children, relying on them to provide for their disabled child. This approach preserves the child’s eligibility for government benefits, but it leaves the disabled child without any certain means of financial assistance. The siblings have no legal obligation to assist the disabled child. Death, disability, bankruptcy, divorce, overreaching spouses, etc., can all interfere with the siblings’ ability to use the money for the disabled child.

Some parents choose to set aside a portion of their assets for a disabled child in “supplemental services” trusts or “special needs” trusts. These trusts are generally adequate for the one-child family, but each contains government “payback” provisions which are a concern for parents with more than one child. The “supplemental services trust” requires a distribution of one-half of its assets to the government at the beneficiary’s death, and it limits the amount that the trust can initially hold (currently $228,000). There is no limit on the amount that can be held by a “special needs trust,” but it requires a “dollar for dollar” payback at the beneficiary’s death for all Medicaid expenditures during the beneficiary’s life. These payback provisions prevent some or all of the disabled child’s trust assets from passing to the other children at the disabled child’s death.

A wholly discretionary trust, in contrast, permits the remaining trust assets to pass to the other children in the family, not to the government, upon the death of the disabled beneficiary.