More than 50% of Americans will be diagnosed with a mental illness or disorder during their lifetime, the Centers for Disease Control and Prevention reports. Chances are, some of these individuals will be inheriting wealth at some point.
If a family member’s mental health issues may interfere with their ability to manage finances, answering these questions could help them create long-term financial stability.
Have I set up a trust?
Setting up a trust is one way to transfer wealth to a loved one and create financial stability for them. A trust enables you to leave specific instructions for trustees about how to care for your loved one and distribute assets.
Trusts can be especially helpful for transferring assets to loved ones who have a mental illness but are still able to function independently. While these loved ones are often independent, they may still have difficulty managing assets on their own, says Lillie Nkenchor, an attorney who does estate planning in New York. One example includes someone with depression.
“You can put assets in a trust,” Nkenchor says. “It can simply be a trust that says, ‘This money is to be used to take care of my sister who is high functioning, but is not great with money.’”
Likewise, you can request money be allocated to health care expenses and anything else that helps them live a healthy and functional life. Having a trust in place can also help beneficiaries avoid probate, a court process for handling estates that could be stressful for someone who has a mental illness.
Another important question to ask is whether the person receives government assistance or may need to in the future. While a basic trust may suffice for a loved one who has a mental illness but mostly functions independently, it could negatively impact one who doesn’t and receives government assistance.
“We want to make sure that if we are caring for someone who’s receiving that type of benefit, we don’t accidentally leave them something that disqualifies them from that benefit,” Nkenchor says.
People who receive government assistance may have limits on how much they can have in assets. For example, to be eligible for Supplemental Security Income through Social Security, they generally can’t have resources of more than $2,000 as an individual or $3,000 as a couple. That is, unless you put those assets into a special needs trust. It’s an estate planning tool for individuals with disabilities or functional needs.
“The special needs trust is meant to supplement government benefits that person is receiving. It doesn’t replace it, it’s meant to supplement it,” Nkenchor says.
Nkenchor adds that a standard special needs trust isn’t effective until the person who establishes the trust dies. So, if you plan to financially support your loved one while you’re alive while they receive benefits, consider setting up a stand-alone special needs trust. Since setting up an SNT can be complicated, it’s advisable you speak to a professional who specializes in this area. The Special Needs Alliance website has a directory that can point you toward attorneys for special needs planning to help you get started.
The right trustees?
The estate managers you name will be responsible for distributing assets to your loved one when you die or if you’re incapacitated. Talisa Utsey, an independent estate planning attorney licensed in Maryland and New York, says a mistake some people make is not appointing the right trustee. She adds that people sometimes take advantage of older adults, young people and those with mental illnesses.
You have two options: someone you know or a corporate fiduciary. Utsey says if you opt for the former, choose someone who has a good relationship with the beneficiary. You also want to be sure they have some knowledge of estates or can get advice from someone who does.
“If they are not familiar with estate administration, if they’re not familiar with the documents that give them the authority, they’re not familiar with their actual authority, then that can be harmful,” Utsey says.
Alternatively, you may choose to appoint a corporate trustee since they’re usually experienced and have no emotional investment. For example, you could use a financial institution like a bank. Just know that corporate fiduciaries often charge heavy fees.
Utsey also advises appointing at least one successor trustee — a person who takes over trustee duties if the initial trustee can’t serve. And don’t forget to consult with prospective trustees first, Utsey says: “Make sure that the primary and the successor are both interested in taking on that type of responsibility.”
Is my estate plan clear?
To protect your loved one from financial abuse and prevent mishandled funds, you want your plan to be clear and streamlined, Utsey says. This means ensuring all your accounts and assets are addressed to the trust, none are in your loved one’s name, and there are clear directions about how money is spent. All assets should flow through the trust if possible.
“When there’s a plan, there’s less likelihood of manipulation and funds being wasted because it’s clear, it’s a process and it’s written down in plain English, and black and white,” Utsey says. “And to some extent, it’s legally enforceable when it’s done the right way.”
Being clear will also help the trustee execute your plan with ease.
The content is for educational and informational purposes and does not constitute investment advice. Elizabeth Ayoola is a columnist at NerdWallet. Email: firstname.lastname@example.org.