Estate planning for adults and children with mental illness presents unique challenges.
These challenges, however, don’t have to become roadblocks.
Read on for an overview on mental health-informed estate planning options and the benefits they entail.
Why mental health matters in estate planning?
Mental illness feels like an invisible, abstract concept, but the National Alliance on Mental Illness’ (NAMI) figure says otherwise.
According to NAMI, 1 in 5 adults in the United States experienced mental illness in 2020, and 1 in 20 US adults experienced serious mental illness in the same year. These numbers mean mental illness is closer to you than you think.
The above numbers also mean mental health conditions inevitably intersect, and ultimately affect, the types of trusts and policies you should consider in your estate plan.
Why does estate planning help children and adults with mental illness?
There are three primary reasons why estate planning is helpful for beneficiaries with mental illness.
The first is mental health-informed estate plans protect beneficiaries with high support needs and intellectual disabilities from predatory care and financial schemes. The second is that mental health-informed estate plans provide extra, non-disqualifying support to beneficiaries who currently or plan to receive government benefits in the future. And the third is that mental health-informed estate plans ensure assets and beneficiaries are properly managed and cared for in the event of your death or incapacitation.
What to consider when estate planning for children and adults with mental illness?
Before diving into applicable trusts, healthcare directives, and long-term care plans, it’s important to know what to consider when estate planning for child and adult beneficiaries with mental illness.
Mental Health Condition Severity
Mental illness and how it manifests spans a large, diverse, and personal gamut. The first, and most important item, to consider is if a loved one’s mental illness makes it difficult for them to manage assets or carry out healthcare directives. For example, individuals with addiction and manic episodes may be vulnerable to misappropriating or overspending funds, while individuals on the Autism spectrum may be vulnerable to predatory schemes and care providers.
Support Needs and Responsiveness to Treatment
Select conditions, such as Schizophrenia and intellectual and developmental disabilities, may require higher levels of support and long-term care plans. Conversely, individuals who are currently working with a mental health professional and who have a demonstrated history of successfully managing their illness may require lower levels of support, and thus may not need long-term care plans or an approved trustee.
Government Benefits and Other Forms of Public Assistance
Social Security Disability, Supplemental Security Income, and Medicaid are just a few of many types of public assistance for people with mental illness.
Always factor in whether or not inheriting an estate could disqualify a beneficiary from receiving public assistance, especially if the money received from a trust means they’ll go over a set income level.
When evaluating the above in your estate plan, consider enlisting the guidance of a qualified mental health professional (with beneficiary with mental illness’ consent).
Trusts for Children and Adults with Mental Illness
Trusts protect your material and financial assets. The addition of mental illness, however, means one must create trusts that account for both your human beneficiaries and the vulnerabilities mental illnesses create.
Discretionary Trusts
Concerned about a loved one with mental illness’ ability to manage or make decisions around finances? Protect them with a discretionary trust.
Discretionary trusts are trusts that grant an approved trustee – a third party who has been given the ability to administer assets – the ability to determine how, how much, and when money is spent from the trust.
Discretionary trusts are most ideal for beneficiaries who do not, and who do not plan to receive, public assistance. They’re also a great match for beneficiaries with mental illnesses that leave them vulnerable to mismanaging funds and overspending.
Third-Party Special Needs Trusts (SNT)
Similar to the above discretionary trust, Third-party special needs trusts (SNT) allow an approved trustee to administer the trust on the beneficiary’s behalf. The difference, however, is that the money in an SNT does not go directly to the beneficiary after the trustee releases it.
Instead, the money in a SNT goes toward paying for the beneficiary with special needs’ care, such as therapy, assistance, and education.
A third-party SNT is best for beneficiaries who currently or plan to receive public assistance in the future, as it doesn’t disqualify them from becoming eligible for or receiving government benefits.
Living Trusts
While living trusts, which allow a trustee to administer or hold the settlor’s assets while the settlor is still alive, seem like a great option for mental health-informed estate plans, they come with several downsides. Said downsides include no asset protection, tax advantages, and an inability to account for the evolving, often complicated needs of beneficiaries with mental illness.
Healthcare Directives
Material and financial assets aren’t the only important aspects of estate planning for children and adults with mental illness. Instructions on who can make health care decisions for you and your beneficiaries with high support needs, called healthcare directives, are the second estate planning essential.
Below are three common healthcare directive forms:
- Medical care directives, which outline your medical care wishes if you become incapacitated. Medical care directives also authorize someone to carry out your or your beneficiary’s medical care wishes on your behalf.
- Power of attorney, which grants one or more persons the power to act or make decisions on your or your beneficiary’s behalf. Common power of attorney scenarios include making medical decisions and managing financial affairs, such as taxes, portfolios, and your assets.
- Revocable and irrevocable trusts. Though revocable and irrevocable trusts both involve managing and distributing your assets, a revocable – or living trust – can be amended without the beneficiary’s consent, while an irrevocable trust cannot be amended without the beneficiary’s consent. Both trust types are subject to different tax, privacy, and flexibility stipulations; consult with an estate planning attorney for more information.
Psychiatric Advanced Directives
A Psychiatric Advanced Directive (PAD) is a specialized healthcare directive that’s unique to Colorado. Carried out via a signed legal form, PADs allow you to outline your wishes regarding refusal or consent to receive psychiatric treatment, who may make mental healthcare decisions on your or your beneficiary’s behalf, and how mental healthcare information is exchanged.
Long-Term Care Insurance
Long-term care insurance is the final estate planning essential for beneficiaries with current and anticipated high support needs. It ensures that they are provided for when you are unable to do so, while also protecting them from predatory care providers.
As long-term insurance policies that provide and cover the costs of an expanded range of care options, such as at-home assistance, adult daycare, and assisted living facilities, long-term care insurance covers gaps regular health insurance – including Medicare – does not. Long-term care insurance also helps protect financial assets in a trust, as trustees and beneficiaries will not need to dip into a trust’s savings to pay for care.
What to Consider in a Long-Term Care Insurance Plan?
- Finances. Evaluate whether or not your assets can cover the cost of long-term care without insurance.
- Your options. Before settling on a plan, compare quotes and explore all long-term care insurance options. Speak with your financial advisors and agents from multiple companies.
- Demographic details. Age, health condition, gender, and martial status affect the cost of long-term care insurance policies. For example, women, who tend to live longer than men, and those with more health concerns pay higher insurance rates, while married couples, men, and those with fewer health concerns tend to pay lower insurance rates.
- Tax advantages. The IRS allows qualified taxpayers with qualified long-term care insurance policies to deduct portions of their long-term care insurance premiums on their tax returns. Premium deduction amounts depend on the taxpayer’s age at the end of the year.
2022 Long-Term Care Insurance Federal Tax-Deductible Limits
| Age at the end of the year | Maximum Deductible Premium |
| 40 or under | $450 |
| 41 to 50 | $850 |
| 51 to 60 | $1,690 |
| 61 to 70 | $4,520 |
| 71 and over | $5,640 |
| Source: IRS Revenue Procedure: 2021-45 |
- State partnership plans. Long-Term Care Partnership Programs are a collaboration between long-term care insurance companies and a state’s Medicaid program. Their purpose is dual-ended, to encourage the purchase of long-term care packages and reduce the financial burden on states. For individuals, Long-Term Care Partnership Programs offer protection from Medicaid’s asset limit and estate recovery. Note that in order to enjoy asset protection, your long-term care insurance policy must be a qualified partnership policy. Qualifying partnership policy stipulations vary by state.
