FamilyFocus@Deacons: Series on mental capacity and financial issues – Financial planning for families with special needs children

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Authored by: Hazel Wong

In our previous article, we discussed the banking industry’s guideline on banking services for persons with dementia, which was introduced in light of Hong Kong’s ageing population and the increasing number of elderly people affected by dementia.  However, ageing and dementia are not the only causes of mental incapacity. Other causes include acquired brain injury (e.g. by stroke or accident) and congenital intellectual disability.

According to Government statistics, Hong Kong had 77,000 to 90,000 people (or about 1% of the population) with intellectual disabilities in 2020.  In many cases, their parents are their main carers.  With the ageing population, many parents are concerned that they are gradually losing their ability to look after their adult children with special needs.  This is particularly so in cases where there are no other siblings or relatives in Hong Kong to help look after these special needs adults.

What are the legal tools available for parents when they are still mentally alert and capable of planning ahead, so that they can make financial provision for their mentally incapable children?

Enduring Power of Attorney

One of the more recently discussed tools is the Enduring Power of Attorney (EPA).  An EPA allows a mentally capable person (Donor) to choose and appoint one or more attorney(s) to manage his/her financial affairs if he/she becomes mentally incapacitated, unlike a conventional Power of Attorney, which becomes invalid when the Donor becomes mentally incapacitated.

For parents of special needs children, to avoid difficulties in accessing banks accounts and other assets to provide for their children, in the event that they themselves become mentally incapable, an EPA is a useful tool, allowing the parents to appoint someone they trust as their Attorney to manage their financial affairs, including continued financial support of their special needs children.

It will also be helpful if the Attorney is made aware of the different needs of the special needs children and to whom various payments should be made so that there will be a smooth transition in case the Attorney needs to take over the financial management of the parents’ assets.

Will

Under Hong Kong law, if a person did not make a Will and passes away, the rules of intestacy, as set out under the Intestates’ Estate Ordinance (Cap. 73, Laws of Hong Kong), will apply.

The legislation provides for distribution of the estate under different scenarios. For example, if a person has a surviving spouse and surviving children, the spouse will receive the first HK$500,000 of the estate and half of the remaining net estate.  The children of the deceased will split the other half equally.  If the person has no surviving spouse but only surviving children, the children will receive the net estate equally.

In the event that both parents of a special needs child pass away without making a Will, the intestacy rules as mentioned will apply.  This means that the surviving special needs child will be receiving at least part of their estate, depending on what other surviving relatives the parents have at the time of passing, and there will be uncertainty as to who will administer their estate.

If the parents each makes a Will appointing someone they trust as executor(s), their assets can be administered effectively according to their wishes.  The executor and trustee may also hold the assets on behalf of the special needs child who is unable to manage the same himself.

Trust

A Trust is also a commonly used legal tool in family wealth and succession planning.  In short, a trust is a legally binding fiduciary arrangement, whereby a settlor transfers assets to a trustee with legal title to hold and manage the trust assets for the benefit of the beneficiaries or for a specified purpose.

The Trust Deed which establishes the Trust sets out the terms and rules upon which the trustee shall hold and manage the trust assets and the rights and obligations of the various parties.

The settlor may also set out his wishes on the future management and disposition of the trust fund in a Letter of Wishes addressed to the trustee, which, although not legally binding, will generally be considered by the trustee to be persuasive when performing its duties.

In the case of a family with a special needs child, the parents may consider setting up a Trust, with funds either injected during their lifetime (i.e. an inter vivos trust) or as a standby trust with funds injected into the Trust after their passing, through their Wills, to provide for the special needs child on a long-term basis, in accordance with the terms of the Trust Deed and Letter of Wishes setting out their wishes as to how the trust fund should be used to support and maintain the special needs child.

Special Needs Trust (SNT) in Hong Kong

However, some parents may not wish to set up a private trust due to the cost or other concerns. In response to community needs, the Hong Kong Government established the Special Needs Trust Office in December 2018 to provide reliable and affordable trust services for parents with special needs children with the Director of Social Welfare Incorporated (DSWI) as the trustee.

Under this scheme, the DSWI will pool together all the trust money in the trust accounts for investment to lower the administration and management costs of individual accounts and will allocate the investment gains or losses, if any, to the individual trust accounts on a pro-rata basis.  After the passing of the parents, the DSWI will make regular disbursements to the individual or institutional carers of the special needs children in accordance with the parents’ wishes for the benefit of the children.

Eligibility for SNT

To apply for the setting up of a SNT, the Settlor must be a parent or relative of a person with special needs, a Hong Kong permanent resident and not an undischarged bankrupt at the time of signing the Trust Deed.

The beneficiary (i.e. the special needs child) must be a person with intellectual disability (including Down’s syndrome), mental disorder or autism and a Hong Kong permanent resident who ordinarily resides in Hong Kong.

Setting up and operation of the SNT

The Trust is set up while the Settlor is alive and well.  The Settlor will discuss with the Trustee, i.e. DSWI, the long-term and detailed care plan and budget and identity of the designated carer, execute the Trust Deed and Letter of Intent, and transfer a specified sum to the Trustee (First payment) which is currently set as the equivalent of 12 months of the estimated expenses for the continuous care of the beneficiary and first year trustee fee.  There is a requirement that the Settlor makes a Will through a solicitor to specify the arrangement of transferring the assets into the SNT after death.

Upon receiving notification of the Settlor’s death, the Trustee will activate the trust account. Payment from the Settlor’s estate into the trust account will be made by the Executor of the Settlor’s Will.  Currently, only cash injections in Hong Kong dollars are accepted.  This means that the Executor will need to liquidate the Settlor’s assets before injecting the funds into SNT accounts. 

The Trustee will then disburse regular funds to the carer appointed, who will be responsible for implementing the care plan. The Trustee will also regularly review the care plan and the beneficiary’s financial needs.

The trust account will be terminated when the Trustee is notified that the beneficiary has passed away or is no longer ordinarily resident in Hong Kong, or if the funds in the account are exhausted.

Conclusion

Parents always want the best for their children and worry about who will look after them after they pass away.  This is particularly true for parents with special needs children.  It is therefore very important for these families to make comprehensive care and financial plans early on while the parents are still mentally capable, so that their special needs adult children will be well provided for after they pass away.

Our Family and Vulnerable Client Practice team at Deacons is experienced in handling family wealth planning and mental capacity matters.  Please reach out to us if you would like to know more.