Headlines about special needs children make me cringe. One out of every 68 children has an Autism Spectrum Disorder according to the Centers for Disease Control. How did the numbers rise so quickly? Wasn’t it just last month it was one in 150? When are we going to figure out what’s going on? That is a question best left to the researchers, I suppose. But that means it’s important to address the financial steps you may want to consider to help ensure that these children are taken care of.
Most people I know have at least one special needs kid in their life. For me, that child is my nephew, Ben, whose autism is so severe it is a certainty that he will need care for the rest of his life. For Ben, as for so many other children with special needs, planning the financial scenario is complicated. But here, essentially, is how it works.
For most special needs children, government programs such as Medicaid and Social Security Income (SSI) are vital for long-term support. Medicaid and SSI are federal programs, but states regulate and administer the benefits. The rules vary by state, but most states require your child–at age 18–to have assets below a specified amount, not including a home or car, to qualify for programs.
If you leave money or assets to your child directly through a will, when he turns 18 that money will generally be counted against him when it comes to determining his eligibility.
Enter the “special needs trust.”
A special needs trust is a special account that the tax code allows you to create for special needs kids. You can fund it with any assets you’d like to pass on to your child, including real estate and paper investments such as stocks or bonds. But because this account is managed and the proceeds used for your child’s needs, rather than owned by and managed by your child for his own wants and needs, anything in this trust is not counted against your son or daughter for Medicaid or SSI purposes.
If you have a special needs kid, and you are planning to create a special needs trust, you will probably want to establish it sooner rather than later. Why? Because it needs to be in place to receive your assets in the awful case that something happens to you and your spouse. The good news is that the process is simple provided you have some help from an estate planning attorney. You will need to appoint a trustee to manage the account in the event you and your spouse are no longer around. Your best bet is finding a planner or estate planning attorney who specializes in these trusts. One option to locate someone is through either the Special Needs Alliance or the Academy of Special Needs Planners.
What is one of the best ways to fund a special needs trust? The vast majority of parents use life insurance. In fact, according to MetLife, many of these trusts for special needs children are funded by life insurance settlements. Survivorship life insurance, which allows you and your spouse to buy coverage under one policy that doesn’t pay out until the second spouse dies (it’s cheaper than a policy written on a single life), can cover costs such as estate taxes. It can be a great way for grandparents to pass money along for your son’s future. They will just need to designate the trust as the beneficiary. Keep in mind that this option only works if you have enough money not only to support yourself after the death of a spouse without the help of life insurance benefits, but also to continue paying the premiums on the policy until you yourself pass away.
Please consult your accountant, tax advisor and/or legal advisor to see if a special needs trust is suitable for your personal situation.