Estate Planning for families of individuals with mental illness (neurobiological disorders)
by DJ JAFFE
The following is not legal advice. Do not rely on it. It was written for one state and may or may not work in your state. Contact your lawyer for more information and to ensure the accuracy of the following.
How can you (or another member of your family) leave money for your mentally ill relative without making them ineligible to receive public benefits such as social security, SSI, Medicaid, etc.? How can you leave money to your sick relative without facing the risk of having them squander it away? These questions are near and dear to every one of us. And there are steps you can take now to ensure that your loved one is properly cared for when you’re gone. You basically have three choices:
You could, in your will, leave all or a portion of your estate to your mentally ill son or daughter so that they can care for themselves. This has the advantage of seeing that the mentally ill individual has the most control over his or her own affairs. The problem with this approach is that your relative will probably lose their SSI, Medicaid, and other benefits, because they will no longer meet the income requirements since they now have money. In addition, the money you leave them will have to be spent on their own hospitalization, medicines, etcetera and will soon be gone. Another disadvantage is that the mentally ill are often not the best custodians of their money. They may spend extravagantly during manic phases, and inappropriately at other times. They may be prey to “get rich quick” schemes and other flights of fancy. So leaving your money to the mentally ill relative is not often a viable option.
2. A second option is to leave the money to someone who is mentally well, and entirely trusted by you. You can then ask this person (example: the brother, sister or spouse of the person suffering from mental illness) to look after the person you intend the money for. The advantage is that someone you trust is now looking after your relative, and your money is being used more appropriately. In addition, because the money was not left to the sick relative, and no written legal obligation is on the well relative to spend the money on the sick individual, the sick individual will not risk losing their public benefits. This approach is based entirely on trust. You leave the mentally well relative the money in your will, and just tell them (before hand) that they are supposed to use it to look after your mentally ill relative.
The disadvantage to this approach (in addition to any tax considerations) is that it has no legal foundation. If the person you leave the money to dies, the money you left them goes to his or her heirs. For example, let’s say you leave your well daughter 100% of your estate, and you tell her that 50% is to be used to care for her ill brother. If the daughter dies, the money is part of the daughter’s estate. It goes to her heirs and you have no way of ensuring that it will be spent on your ill son. So this arrangement has it’s own problems. 3. A third option is to establish a discretionary trust. And this is the option you will probably want to use.
3. Discretionary Trusts
The goal of estate planning for a public welfare recipient is to see that the money, property, and possessions you leave your mentally ill relative to goes to them. You don’t want it to go to cover costs that the government (SSI, Medicaid, Social Security, NYS, etc.) would otherwise pay for. You also want to protect the money from being squandered or inappropriately spent by the person it is supposed to benefit. The best way to accomplish this is to set up a Discretionary Trust.
A Discretionary Trust is a special kind of trust fund you set up for your sick relative. You set up the trust, and in your will, leave however much money, property, possessions, etc, you want to go to your mentally ill relative to the trust instead of the relative. (Any relatives who may want to leave money to the disabled person should also be instructed to leave it to the Trust instead.) You then choose a Trustee for the Trust. The Trustee is the person who will mange and distribute the money you give the trust to the person you want. He will manage the money for as long as the trust exists. He will make all investment decisions and decide how much (if any) money should go to the person the trust was set up for. It will be the trustee, not the beneficiary of the trust who determines how the money is spent.
Why Discretionary Trusts Work
Because the beneficiary (your mentally ill relative) does not have access to the trust on his/her own, the trust will not be considered an asset of the beneficiary in determining their eligibility for public assistance. This is what makes a discretionary trust so useful. There are two ways to protect the Trust from governmental and other third parties (example: people whom the mentally ill relative owes money to). The first way is to give total freedom to the trustee to distribute income or principal as he sees fit–but not requiring him to do so at all. (If the trustee were required to provide any specific benefits to the beneficiary, the state might be able to use those requirements to invade the trust.) A second way to protect the trust is to prohibit the trustee from making any distribution that would render the beneficiary ineligible for public benefits. A sample Discretionary Trust form is enclosed.
Obviously, choosing a Trustee is critical. You must choose someone you know will look after your relative properly. Someone you trust. One thing to remember is that the trustee has power over only the trust. He does not have power over the individual. He cannot insist the person do X or Y, but he does have the power of the purse string to help influence decisions the mentally ill person may make.
Discretionary Trusts and Medicaid Benefits If the Discretionary Trust is set up properly, you won’t jeopardize Medicaid benefits. The consolidated Omnibus Budget Reconciliation Act of 1985 (P.L. 99-272, 42 U.S.C. Section 1396a) excludes income from a discretionary trust that was set up by a will or non-spouse from being considered for eligibility for Medicaid. SSI and SSDI To understand how Discretionary Trusts affect social security benefits, you have to understand a little bit about social security. The social security that you get when you are 65 is yours no matter how much you make. So we are talking only about SSI and SSDI. If someone is disabled, and doesn’t have a lot of money, he is entitled to SSI. If their parent then dies, they are entitled to SSDI, in lieu of SSI. But if the benefit under SSDI is less than the SSI level, then the person can get an SSI check to make up the difference. SSI is means tested. That means if someone has too much money, they don’t get SSI. SSDI is not means tested. If your guardian is dead, you can get SSDI no matter how much money you have. The way to avoid jeopardizing SSI benefits is to use a Discretionary Trust. The Program Operations Manual Systems (POMS, the basic handbook of the Social Security Administration), sets forth in Section 01120.105 that a trust does not count as a resource of a beneficiary as long as the principal is restricted (e.g., only the trustee can invade it).
When considering if the Trust is a “resource” of an SSI beneficiary, the Social Security Administration has the following rule: If the SSI beneficiary or his/her representative payee has access to the money in a trust it will be considered a resource. But if the beneficiary or representative payee doesn’t have access to the money it will not be considered a resource. It’s all in how the trust is structured. In determining whether the payments to a SSI beneficiary qualify as “income” to the beneficiary, the Social Security Administration has the following rule: If cash is disbursed directly to the beneficiary it will be considered to be income. If cash is disbursed through a third party for other than food, clothes, or shelter, it will not be considered a resource or income. However, if the money is disbursed to a third party and used for food, shelter, or clothing, it will be considered to be income, but will be capped at “presumed maximum value”, i.e. one-third reduction plus $20,
Discretionary Trusts and State Benefits
If the discretionary trust is set up properly (and includes the appropriate restrictive language) it won’t jeopardize state benefits. In NYS the right of a trust not to have to provide assistance which public programs would otherwise provide was established in the case of the Estate of Martin Escher, Deceased. Choosing a Trustee You must be careful in selecting another child of yours as trustee because he or she may arbitrarily withhold money from your mentally ill child with the hope of receiving the undistributed funds on the death of the ill child. If the trustee you appoint is negligent, he or she can be sued. The trustee does not have to be a resident of your state. If there is no trustee appointed, the mentally ill person receives his or her share outright, with no legal supervision. Remember, if a bank is named as trustee, it will not particularly care about what is best for a mentally ill relative the same way a trustee appointed by a caring relative would. You must be extremely careful to select an appropriate, mature trustee. Problems can arise when you appoint more than one trustee to be responsible for allocating your money to a mentally ill relative. Disagreements over appropriate disbursement often occur. It’s better to have only one trustee at a time make the decision. Again, be certain this is a person you can trust. If the trustee you have appointed dies, be sure you have named a second, alternate trustee with the same qualifications.
Don’t state in your will the exact amount or any amount to be distributed to a mentally ill person by a trustee. The trustee must be trusted to use his or her own judgment, depending on the emotional condition of the ill person. Choose a trustee who is familiar with the problems of the mentally ill, not someone who would give in to manipulative, irrational threats and coercion tactics sometimes used by ill persons. And remember, it is the trustee who will have to decide how much of your estate to pay out for the beneficiary
How to establish a Discretionary Trust
There are two steps to setting up a Discretionary Trust. You must first (along with a lawyer) fill out a Trust Instrument like the one enclosed, naming the Trustee, Successor Trustee, and Beneficiary. Make copies. Take one copy to a bank and with a $100 deposit you open a Trust Account. After the Trust Account is established, anyone can leave money in a will, insurance policy, assets (home, stocks, etc.) to: The Discretionary Trust Of __________. More things you should know Money can be left to a mentally ill child’s spouse and/or children. Also, a husband or wife is responsible for his or her spouse under N.Y. State law.
Even if separated at the time, the spouse is liable for expenses. Therefore, although it appears to be inappropriate, the best protection for the spouse of a mentally ill person may be divorce. A guardian named in a will is only a guardian of property (in this case, money). He or she is court-appointed when needed. An executor distributes and probates a will. A Trustee administers the terms of a trust. If a beneficiary’s Medicare runs out, the trustee can assign money from your trust to pay hospital costs. It’s a good idea to include a line in your trust to the effect that “if the government steps in, the trust ends” in order to preserve the mentally ill person’s right to hospital, health and disability income benefits. It’s a good idea to have an alternative option, or plan, in case your mentally ill loved one gets well. This is a real possibility.
Call your lawyer today. Before you are in an accident. Before you are too sick to start a trust.
Choosing a lawyer and trustee
It is important to choose the right lawyer when setting up a will, or creating a Discretionary Trust. Ask friends in similar situations who they use. Then interview the lawyer. Ask if they have ever set up a Discretionary (Special Needs) Trust before. If they haven’t, find someone else. If they have set one up before, question them. Can they give you the reasons why a Trust is good? If not, find someone else. NAMI meetings are a good place to meet others in your situation and ask them who their lawyer is.
Don’t forget to ask your lawyer how much he charges. Setting up a simple Trust or will is not that complicated. Find someone who is affordable.
Leave Money to Mental Illness Research in your Will
When setting up your will, please remember mental illness research with a small donation. Tell your lawyer to insert one sentence in your will that says, “I hereby leave (insert amount or percentage) to (name of organization) to carry out their work in helping the mentally ill.” Since there is a hereditary factor to mental illness, this will help those who come later. In addition, we hope you will let your friends and relatives know that when you (or a relative) pass away, in lieu of flowers, you would like mourners to make a donation to mental illness research. Good organizations include the National Alliance for Research on Schizophrenia and Depression (NARSAD.ORG); the International Mental Health Research Organization (IMHRO.ORG) and the Stanley Medical Research Institute (http://www.stanleyresearch.org/dnn/)
Donate brain tissue
There will be very few advances in learning about the causes of mental illness, unless both well, and mentally ill individuals donate their brain tissue for research. The number to get information on this or to make a donation, is 1-800-BRAIN BANK. We strongly urge all members to make a call, and get information on this. MI is something that we may pass on to future generations. Therefore those of us here now, must agree to make a tissue donation so future generations won’t have to suffer.
LIFE INSURANCE AND YOUR ESTATE
(Washington AMI provided the following information)
Beneficiaries May Not Always Benefit
Owning or receiving proceeds from an insurance policy may cause problems for a disabled person. First, a beneficiary may not be able to handle money well. Second, if a beneficiary is receiving government benefits, they may be terminated if the beneficiary owns insurance or receives insurance payments. Insurance proceeds will then have to be used to pay for things the government would otherwise pay for. The insurance proceeds would be quickly depleted and assistance might not be regained until the proceeds are used up. For these reasons, it is unwise to name an impaired relative as direct beneficiary (or the owner) of an insurance policy. If you have an existing policy, you should immediately make someone other than your sick relative the beneficiary (or owner) of that policy
Use A Discretionary Trust for your Life Insurance
The best way to avoid potential problems is to establish a trust and name the trust as beneficiary of the insurance policy. When the insured dies, the proceeds of the policy will go into the trust, which has previously designated the disabled person as beneficiary (see Discretionary Trust article enclosed). A designated trustee will then manage and administer the assets from the insurance settlement for the beneficiary. The trust can contain assets in addition to the insurance policy. Your attorney and insurance agent should work together to establish the proper coverage & documents.
The Advantages of Life Insurance Life insurance can provide for your mentally ill relative when you pass away. It’s a good way to fund a Discretionary Trust. Life insurance can instantly “create an estate,” and provide support and protection for your mentally ill loved one after your death. Life insurance creates money at the precise time it is needed, and in the amount needed. It can be purchased for relatively small regular premium contributions. It is currently tax favored — accumulations grow tax deferred and proceeds are paid tax-free to beneficiaries. In addition, it can be modified throughout its lifetime, as needs change. Through selection of term or whole life options, it can be tailored to meet your goals. A knowledgeable insurance underwriter can help you decide what insurance product is best for you.
Points to Remember Regarding Insurance
The amount of insurance purchased should fit your anticipated needs and be within the limits of your ability to pay. It can be financially disastrous for a mentally ill person to own insurance, or to be designated as a direct beneficiary of an insurance policy. Mentally ill persons who are recipients of state or federal aid will probably lose benefits if they receive a direct insurance policy settlement. A federal or state agency providing care and/or services to a mentally ill person may seek reimbursement from insurance proceeds paid to the disabled person. Life insurance, whether it be an individual policy, a policy provided through a place of employment, or part of a motor vehicle policy, should designate an estate or trust as beneficiary. This eliminates a possible direct payment to a mentally ill relative that might disqualify the relative for government benefits. How to keep your MI child on your insurance coverage.