How to plan your estate if you have a special needs child

Almost three million children in the U.S. between the ages of five and 15 have special needs, according to the latest Census figures. Parents of these children need to use extra care in planning their estates.

For most people, estate planning is about making sure your assets go where you want them to, and minimizing inconvenience and taxes along the way. But parents of special needs children face an additional challenge because they have to make sure that their children will continue to be cared for, even if they have trouble caring for themselves.

One of the best ways to do this is with a “special needs trust.”

Many people with special needs are eligible for government programs that finance their basic support needs. This includes health insurance coverage and direct cash payments through the Medicaid system and Social Security. The problem is that people are eligible for these programs only if they don’t have enough assets to pay for those items themselves. If a person with special needs has assets in his or her name, the government wants the person to use those assets before it will provide support.

This means that if parents or other relatives leave money directly to a child with special needs, this can have the effect of disqualifying the child from Medicaid or Supplemental Security Income. Leaving money to such a child may actually harm the child, since those benefits, including medical support, will potentially be forfeited.

The typical solution is to put the money into a trust with the child as the beneficiary. If the trust is properly set up, it doesn’t count as the child’s asset, and it won’t disqualify him or her from benefits.

The trustee can be instructed to use the trust assets to pay for things that aren’t covered by government programs. For instance, the trust money can be used to provide travel or cultural opportunities. It can be used to purchase sports tickets, consumer electronics, and other items that can enhance the child’s quality of life.

For this reason, these trusts are sometimes called “supplemental needs trusts.”

You can create a trust now and fund it, so that your investments will grow and become available later when the child needs them. You can also leave money to the trust in your will. Many parents buy life insurance and name the trust as the beneficiary, so they can be sure the trust will be well-funded after they’re gone.

If the child receives money directly from another source – for instance, proceeds from a lawsuit – it may be wise to structure any settlement so that the proceeds go to the trust rather than to the child directly.

The exact rules for these trusts can be complicated, and they vary from state to state and also depend on the source of the funds.

If you set up a special needs trust, keep in mind that it’s not only your own estate plan that needs to be amended. If grandparents or other relatives have wills that leave money to the child, you’ll want to ask them to change their plans as well, so the money goes to the trust. You’ll also want to change any beneficiary designations on retirement accounts and name the trust instead.

Another thing to consider is who should be the trustee. Parents and other relatives can be trustees, although if you’re not comfortable with handling investments you might want to name a financial institution, or at least enlist the help of a financial advisor.

If you’re the trustee, you’ll need to be careful when making disbursements always to give the money to a third party. For instance, if you’re buying travel tickets, you’ll want to pay the provider directly rather than giving the money to the child – because giving the money to the child could affect his or her eligibility for government benefits.

Also, if you’re the trustee, you’ll want to consider who will be the successor trustee if something happens to you.

If you name an institution as a trustee, you might want to write a detailed letter telling the trustee about your child and what he or she likes and dislikes. This can be very helpful if something happens to you and you’re not around to provide guidance. The letter can be updated as often as necessary.

If you can’t find an appropriate trustee or if your trust is small in the beginning, another possibility is a “pooled” trust managed by a non-profit organization that focuses on disability issues. These trusts gather assets from many families and pool them together for investment purposes.

On a separate note, parents of minors with special needs should be sure to create powers of attorney and guardianship documents that allow them to act as the child’s agent after the child turns 18. Otherwise, you might run into difficulties when making financial and health-care decisions for your child later on.

SIDEBAR: Most parents of special needs children aren’t planning properly

Some 62% of parents with special needs children have no plan at all to cover the cost of caring for their children when they can no longer do so, according to a survey by the Hartford Financial Services Group.

And even among parents who have a plan, many are making big mistakes. About half plan to leave money to their child in a will and some 58% name their child as an account beneficiary, both of which can disqualify the child for government benefits. Only 25% have created a special needs trust.

Among parents of teenagers with special needs, only 46% have a life insurance policy, even though a reasonably priced policy with a trust as the beneficiary can make a huge difference in a child’s life after a parent is gone.

One reason why so many parents make mistakes: Only 16% of those with a plan consulted an attorney or other advisor when creating it.

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