For parents or caretakers of people with special needs, the stakes are higher when it comes to financial planning.
Not only are they trying to meet their own current and future financial goals, they also want to ensure their loved one's needs continue being met if the caretaker predeceases their charge.
Enter the special needs trust.
"A special needs trust is the cornerstone of planning for a person with special needs," said certified financial planner Michael Walther, founder of Oak Wealth Advisors. "But it has to be done in a way that [ensures] they still qualify for government benefits."
According to a 2015 study by the Centers for Disease Control and Prevention, 53 million adults — roughly 1 in 5 — have a physical or mental disability that impedes their daily functionality.
Generalizing the costs associated with special needs is difficult, because it depends on the severity of an individual's disability. Special needs can range from autism spectrum disorders and bipolar disorder to cerebral palsy and genetic disorders. Additionally, disabilities can be brought about by an accident or injury.
But collectively, the CDC says, disability-associated health-care expenditures run about $400 billion annually. On top of that are non-medical costs related to caring for a special needs person.
A special needs trust ideally holds and manages assets for the beneficiary in a way that ensures crucial government benefits — such as Medicaid and supplemental security income (SSI) — remain available.
To qualify for those benefits, a person must have less than $2,000 in assets. When set up and administered properly, a special needs trust protects that qualification because the beneficiary does not own the assets.
"The most important thing is making sure the individual qualifies for SSI and Medicaid, because they provide an enormous amount of benefits," Walther said.
Money in the trust goes toward expenses not covered by government benefits, such as education programs, a phone, clothes or other extras. Sometimes a person's disability requires daily care that can range from a few hours to round-the-clock.
The two most common types of special needs trusts are first-party and third-party trusts.
A first-party one holds assets belonging to the beneficiary. This is more typical when the person is older and developed a disability after accumulating assets or receiving them as an inheritance or injury-related compensation.
But whatever the government spent on the person must be reimbursed by the trust at the beneficiary's death.
Third-party trusts hold assets given by others (such as a parent or grandparents) and have no payback provision.
To create a trust, start with a specialized attorney. If you work with a financial advisor, ask for a referral. Additionally, groups like the Special Needs Alliance and the Academy of Special Needs Planners can put you in touch with attorneys, financial planners and other pros who focus on special needs trusts so you can be more certain to cover all your bases.
"Generally speaking, you have to be extremely careful how the trust is worded," said CFP Stephanie McElheny, assistant director of financial planning at Hefren-Tillotson.
The cost to set up a special needs trust is a few thousand dollars, according to various estimates.
Another cost is the trustee's fee. Depending on the complexity and particulars of the trust, a trustee's fee will be a fixed annual cost or a percentage — up to about 1 percent — of the trust's assets.
Financial advisors recommend giving careful consideration to trustee choice, because mistakes in the trust's administration can lead to — you guessed it — loss of government benefits.
For instance, if money is sent to the beneficiary so he or she in turn can pay a bill, government benefits could be affected.
"Regardless of what it's being used to cover, the check should be sent to the service provider," McElheny said. "If it goes to the beneficiary, it's considered a distribution to the beneficiary and can disqualify them from SSI."
Walther said his firm typically recommends hiring a professional trustee who is not only comfortable making all distribution decisions but familiar with the administrative tasks of managing a trust, like taxes and reporting requirements.
Additionally, if you want to name a family member or friend as trustee, check with the person first. "It can create a burden for the trustee," said Walther of Oak Wealth Advisors. "Sometimes it's an anxiety they weren't expecting."
In conjunction with setting up a trust, advisors say it's important to make sure that the assets you want to leave behind are not left outright to the person with special needs.
For instance, if you bequeath your individual retirement account outright to the individual, government assistance might be suspended until the situation is rectified. IRAs and other tax-advantaged retirement funds can be bequeathed to the trust, but there are potential unwanted tax consequences if not set up properly.
Make sure, too, that you understand the particulars of any life insurance policies you want to leave for the individual. Term life insurance, for example, comes with low premiums but will expire at the end of its term, which might not meet the needs of the beneficiary.
Walther said caretakers also should be aware of a relatively new way to fund expenses. Created in 2014, ABLE (Achieving a Better Life Experience) accounts are tax-advantaged savings accounts for people with disabilities.
In simple terms, after-tax contributions to the account can be made by anyone. Income earned in the account is tax-free, but the annual contribution limit is $14,000 regardless of the source, and the balance must remain below $100,000 to avoid losing any government benefits.
Additionally, the person's disability must have existed before age 26, and income tests must be met.
"It's another tool to use in conjunction with a special needs trust," Walther explained.
Regardless of how a caretaker aims to meet the needs of the special needs person, advisors caution caretakers to avoid putting their own financial needs at risk.
"If they are financially unstable themselves, that will directly and indirectly affect the [person] they are taking care of," said McElheny at Hefren-Tillotson. "They need to make sure they're meeting their own financial obligations, because if they can't pay the bills, that will be a bigger problem."
— By Sarah O'Brien, special to CNBC.com