Planning for Special Needs Children

Derek Ferriera and Martin Johnson
Posted: 9/1/2010

Parents and guardians of children with special medical needs face many challenges. One of the most significant can be how to provide financial support for expensive, on-going medical or custodial care, particularly after the parents’ or guardians’ deaths.

Your special needs child may be eligible to receive government benefits based on his or her disability and need. Generally, in order to qualify for these benefits, certain asset and income limits must be met. If your family wealth exceeds those limits, your child may be disqualified or receive reduced benefits. During your lifetime, you and your spouse can supplement any government assistance. But careful planning is essential to help ensure that your child's needs are met when you and your spouse are no longer there to help.

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Disinheritance – A frequently used, but often unsatisfactory solution, is to draft your will so that your special needs child's share is left to a sibling. The idea is to help ensure that your disabled child won't have excess assets, so that he or she will qualify for governmental programs. Of course, there's no guarantee that the sibling will spend the money as intended. The sibling might use the assets for other purposes, lose them to creditors, or die without making further provisions for your disabled child.

Trusts - Another way to maintain your disabled child's ability to receive assistance as long as possible is through a trust. Trusts are widely used in financial planning for many reasons. You can provide for the benefit of others, keep control of assets away from certain individuals, or, if properly structured, protect assets from the reach of creditors. There are many different types of trusts - each with its own advantages and limitations.

Here are some trust arrangements to consider. You could set up a single trust for the trustee to draw on for all of your children's needs. The trustee could be instructed to take care of your disabled child first before making discretionary payments to the other beneficiaries. Or you could have separate trusts for each child. That way, the trustee can pay for needed expenses out of the disabled child's individual trust, instead of reducing the shares of your other children.

Whatever type of trust you use, it should be carefully drafted so as not to interfere with qualification for government aid. If your disabled child's interest in a trust is deemed by the government to be an available resource, it may put him or her over the minimum asset and/or income requirements. The trustee may be given discretion to make distributions on behalf of your special needs child. To avoid jeopardizing your child's ability to get government benefits, the trust shouldn't mandate that monies be used for the child's basic necessities - such as food, shelter or clothing. Those needs are generally covered through government programs. The trust funds should essentially be used to supplement those programs.

Parents and guardians of special needs children are naturally concerned over who will provide the extras - the "quality of life" things not covered by entitlement programs. The trustee's discretion should be limited to using the trust monies only for extra expenses not otherwise covered by government aid, such as recreation.

The trust can also provide that if eligibility for assistance is to be cut off because the trust is considered an available resource, the trust will terminate. The assets would then be distributed to your other children. That way, your special needs child would have no resources and may qualify for benefits.

A common method of funding a special needs trust is with life insurance. If only one spouse is employed, a traditional single-life policy on that spouse's life should be considered. For two wage-earner couples, a second-to-die life insurance policy may be used. This latter policy, which pays off only when both insureds die, may ensure continued financial assistance for your special needs child when it will be needed.

There are no easy solutions to the problem of how best to provide for your special needs child. To understand all the options, talk to a qualified professional with experience in this field.

www.mycsolutions.com

Derek Ferriera CFP(r), CLU, CHFC, REBC and Martin Johnson are registered representatives of Lincoln Financial Advisors Corp., a broker/dealer, member SIPC. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.

Derek Ferriera CA Insurance License # 0665169
Martin Johnson CA Insurance License # 0B69397

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