Caring for children with special needs can require a lot of financial and logistical planning to ensure they're experiencing the best quality of life possible.
But what many parents don't adequately plan for is the possibility that they won't be around to manage and fund their child's care. Not having a well-thought-out plan—or having no plan at all—to care for children with special needs once you're unable to could have a devastating impact on their lifestyle and well-being.
"One of the biggest things for special needs parents, and what I worry about more than anything, is [whether] my son [will] be provided for as well in the future, after I'm gone, as he is now," said certified financial planner Ken Van Leeuwen, managing director at Van Leeuwen & Co. and father of a teenage son with special needs.
"When you come to the realization that your child has special needs, you need to start planning," he said, adding, "You want to try as best as you can to keep your child in the same lifestyle. You don't want them to be just dependent on federal or state programs."
The government offers medical and financial assistance to people with special needs through programs such as Medicaid and Supplemental Security Income to offset the high costs of care. Unfortunately, these programs, at best, support a person at the poverty line.
That's why most parents who can afford to supplement with additional funds do so. But where many parents go wrong is not properly setting aside funds for when they die.
For example, one common mistake parents and family members make is holding assets such as bank accounts in the child's name or naming the child as the beneficiary of wills, insurance policies or retirement accounts.
Here's why that's a problem: To qualify for programs such as Medicaid and SSI, it's best for the special needs person to have no assets in their name. SSI, for example, requires an individual to have less than $2,000 in assets to qualify. If you leave money directly to an individual with special needs, you may be disqualifying them from receiving the governmental assistance they need.
Attorney and certified financial planner Gary Altman, founder of estate-planning law firm Altman & Associates, said another frequent mistake is leaving money to another person to care for the child with special needs.
A typical example, he said, would be parents leaving money to their daughter to care for her brother. The problem is, there's no guarantee the daughter won't put her brother in a home and keep the money. Or if she does take care of her brother as agreed but then gets sued or divorced or dies, the money might not be available to him any longer.
For most families, the best solution is to create a special needs trust with the special needs child as the beneficiary.
Assets in a special needs trust can be used toward a range of items and services for the beneficiary, from buying a home or a handicapped-accessible vehicle to paying for recreational activities.
The beneficiary has no direct control over the trust—a trustee manages it—so the assets don't disqualify them from receiving public assistance. As long as a parent (or anyone else other than the beneficiary) funds the trust, the government has no claim to the assets after the original beneficiary dies. Successive beneficiaries can also be named.
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Even families with significant resources who don't receive government assistance could benefit from this type of trust as it protects assets if, for example, the beneficiary were sued or divorced.
While the special needs trust is a great financial-planning tool, experts say it has a lot of nuances and therefore needs to be carefully drafted by an experienced estate-planning attorney to ensure it complies with regulations and will provide proper support.
Once a trust is created, one of the biggest challenges is determining "how much financial support the child [will] need for a lifetime," said Hal Wright, a certified financial planner with Colorado Financial Partners.
"It's very difficult to estimate, but that is crucial because the estate plan has a hollow center if you don't know what the needs are," said Wright, who consults with families of special needs children and has an adult daughter with Down Syndrome himself. "Families always want a number, but the problem is, it's so unique to each family."
Wright has seen special needs trusts range in value from $250,000 to $1 million. Some factors that influence the value include the expected lifespan of the trust grantor and the beneficiary, the availability and adequacy of government assistance, the level of professional services needed and whether the trust will go toward buying a residence.
Funding the trust can be even more complicated if there aren't enough resources to satisfy the financial needs of other children in the family.
Another important decision to be made is designating the right people to manage the trust and make decisions about the beneficiary's care.
While most families opt for a close relative, often a sibling, to act as guardian, experts suggest choosing someone at arm's length to act as trustee. This can be a family friend, non-immediate relative or a corporate trustee, such as a bank. Wright said this often serves the child's best interests more efficiently and effectively.
Congress to 'en-ABLE' special needs savings
While special needs trusts have been the go-to financial planning tool for people with special needs, there may be another option on the table in the not-too-distant future.
In February 2013 the ABLE Act—which stands for the Achieving a Better Life Experience Act—was introduced to Congress with the objective of amending the IRS code to allow people with special needs and their caregivers to create tax-free savings accounts, similar to 529 college savings plans.
Under the act, families of people with disabilities could set aside up to $100,000 in a tax-advantaged savings account. The assets wouldn't be included in the beneficiary's assets, which would allow them to continue qualifying for federal programs such as Medicaid and Supplemental Security Income.
The money in the account could be used toward qualified expenses, such as health care, housing, transportation, employment training and other types of educational and community support.
The ABLE Act includes a Medicaid payback provision, which requires any money that remains in the account after the beneficiary dies be repaid to Medicaid. This is different than a special needs trust, which allows subsequent beneficiaries to be named.
The act has garnered considerable bipartisan support in the House of Representatives and is currently awaiting a financial assessment from the Congressional Budget Office.—J.W.