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Special needs children need special financial plans

When Nadine Vogel's daughter Gretchen was born, the doctors said she probably wouldn't live more than two days. Gretchen, born with a neuromuscular disorder, couldn't swallow and needed to be fed through a tube in her stomach. There were other medical issues as well.

At her daughter's side for 18 hours a day, Vogel barely slept.

"I was afraid that I'd fall asleep at the wheel and die in a car crash," she says.

If she and her husband died, she wondered, what would happen to Gretchen? Before the child left intensive care, the Vogels put together a plan to make sure her needs would be met if something happened to them.

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Seven years later, the Vogels went through the process again when Rachel, their younger daughter, was born with a rare heart condition.

"When I'm gone and my husband is gone, life will change for them," Vogel says. "What I wanted to make sure was that it wouldn't change in any way it didn't have to. I want them to have all the things I deem important. I wanted to give them the ability to become as independent as possible."

Financial planning for families with special needs children is complex and unique. Structured properly, it can assure that a child retains the same quality of life that his parents provided. But if the financial and legal arrangements are mishandled, a well-intentioned parent could destroy a son or daughter's eligibility for essential -- and expensive -- services.

Social Security provides special-needs individuals with money for food, shelter, clothing and medical care, according to Marla Kraus, executive director of Special Needs Advocate for Parents, a national nonprofit organization that Vogel founded. Having even a modest amount of assets in their own names can cut them off from benefits.

"The classic situation is a parent leaves the child the house," Kraus says. "That could be a disaster."

A financial planner, Vogel had a wealth of information at her fingertips. After years of fighting to obtain services for her daughters, she also had a huge storehouse of experience to share. In addition to starting SNAP, she created MetDESK, the Division of Estate Planning for Special Kids at Metropolitan Life, where she is a vice president.

The enormity of the task creates one of the biggest problems for special needs families -- a failure to plan.

"The federal law says if you leave a person with special needs with more than $2,000, they'll automatically lose benefits," Vogel says. "It kind of paralyzes people to not doing any planning or do the wrong planning."

But without proper planning, a family member with special needs could become a ward of the state after his parents' death.

"His standard of living drops dramatically to a level where he lives in the most basic sustenance," says Christopher D. Sullivan III, vice president and manager at Merrill Lynch's Special Needs Financial Services Group. "You can see that the underlying fundamental problem behind it all is lack of planning and lack of time."

While every family's situation will be unique, there must always be a special needs trust, a letter of intent, a trustee and a guardian.

The special needs trust
A special needs trust has one purpose: to leave assets to care for a loved one while protecting his eligibility for government benefits.

It needs to be drawn up by an attorney with background in that area.

Financial planners stress that special needs planning requires a qualified team that includes a family member, a social worker or medical professional to discuss ongoing care needs, an attorney and a certified public accountant.

Don't make the mistake of using a relative or friend if that person lacks the proper experience.

Ask the attorney and CPA how many special needs trusts they've handled in the past year, what percentage of their client base is special needs families, and how well-versed they are in government benefits eligibility.

"This kind of estate planning is different," Kraus says. "Here, oftentimes, you need to create money, not preserve it."

It's critical, Sullivan says, to alert extended family members about the existence of the trust.

"Often, parents neglect to tell the relatives -- like aunts, uncles, grandparents -- not to make a special gift in the name of the special needs child," he says. "Once they get more than $2,000 in assets, it jeopardizes their government support. If they want to make a gift, they should write checks to the trust, not to the name of the child."

Funding options
When considering funding sources for the trust, parents not only have to consider their own longevity for retirement, but the potential life spans of their children.

"That's a very positive and wonderful thing to think about; there's no fear in that," says Adriane Berg, editor of Wealthbuilder Financial, a family newsletter.

"Your decisions for what happens to them after you're gone depends on knowing they'll be there for a long time. So you filter your decisions through this realization. You're not dealing with a 12-year-old. It's for the benefit of a 50- to 90-year-old."

The most common source of funds in a special needs trust is life insurance. Vogel recommends a second-to-die, or survivorship, policy, which only pays out when both named policyholders die and, thus, is more affordable than regular policies.

"As long as one parent is alive, we're going to take care of our kids," she says. "If we have to work four jobs, we'll do it. It's when we're both gone, we want to make sure our children don't become a financial burden and get the care they need."

Vogel and other financial planners caution against considering a house or an individual retirement account as the principal asset funding the trust.

"The house is something you should leave; don't rely on it as a key asset," Vogel says. "401(k)s aren't a bad thing to leave, but how long will you have contributed to that plan when you die? Will you have used a lot of the money? Don't count on it as the sole asset."

Besides, that's what the parents will live on after they retire.

"You have to make sure your retirement is set first," says Robert Kosbie, a CPA in San Diego, who works with several special needs families. "How will they help their special needs child if they can't take care of themselves? It's not being cruel -- these are just the things we have to do."

For parents who can afford it, Berg suggests considering an immediate annuity, "which no one likes except people with disabled kids.

"You take a lump sum of money and give it to an annuity company in return for a lifetime income, no matter how long they live," she says. "If they live to 120, that amount will come to them."

For individuals with substantial retirement funds, Berg also suggests taking advantage of the new IRA stretch-out rule, which allows the fund to continue to accumulate tax-deferred after the account holder's death. An IRA will must be attached to the form filled out with the IRA custodian.

"It's not a will because you don't want your estate to get the money," she explains. "It goes to a separate trust, and all the things you've planned get funded by the IRA."

Parents considering that option will need to make sure their IRA custodian permits it. Not all of them do, Berg says.

Another savings tool to consider is the Educational IRA. Under the tax bill passed in June 2001, the rule was changed that made the earnings subject to tax and penalty if they weren't exhausted by age 30.

"Congress wanted more flexible rules for the benefit of special needs students," says Dave Evans, vice president of retirement and financial planning with the Independent Insurance Agents of America. "In the case of a special needs beneficiary, the age 30 ceiling is lifted."

Plus, the annual contribution limit was increased from $500 to $2,000.

"As that's earning money, there's no issue about the earnings offsetting benefits," Evans says. "If you do $2,000 and fund it for 20 years, to me, that could be a significant sum."

It could also cover a wide range of training opportunities.

"Clearly, you're not talking about spending money, but you could be extremely broad," he says. "The educational IRA isn't a panacea, but it's another club in the bag."

Letter of intent
The letter of intent is your instructions to the trustee and the guardian on how you want your child cared for when you're gone. It's not a legal document, so it should be witnessed and notarized. If the child has cognitive ability, he should be involved in drafting the letter.

It should be specific, and cover such issues as health care, education, living arrangements and religious preferences, Vogel says. If your child loves baseball and you want him to be able to go to every home game, this is the place to discuss that.

"Share it with the guardian because it tells them what you expect," she says. "When you just ask, 'You're always going to make sure Johnny's taken care of, right?' it's very vague. The name and address of physicians, areas of specialty, doctors you never want them to go back to, put that in."

Choosing who will care for your child
In addition to establishing and funding a special needs trust, the most critical decisions for parents are the selection of a trustee and a guardian. The trustee will have control over the child's money and its investment; the guardian will be responsible for his day-to-day care, including life-and-death medical decisions.

It's vitally important because "when someone turns 18, they're a legal adult whether they function as one or not," Vogel says, a situation that can leave a special needs loved one an easy target for exploitation, especially if he has significant assets.

Some families may decide to use the same person as trustee and guardian; most choose two people, or may use a family member as guardian and a financial institution as a trustee. Since the individuals will have responsibilities to the child for his lifetime, successors need to be selected as well.

Many parents mistakenly assume that their able-bodied children will take over responsibility for caring for a disabled sibling.

"In most cases, they don't want that responsibility," Sullivan says. "After they've seen what their parents have gone through, they don't want to make that sacrifice, unfortunately."

Once a trustee and a guardian have been selected, it's important to review the plan on a regular basis, or at least after a major life event, such as a marriage, divorce, a job change, or the birth of a child.

"An older brother says, 'Yeah, I'd be honored to (be the trustee).' But that was when he was single and starting his career," Kosbie says. "Now, he's married and lives halfway across the country. It may not be practical anymore. You need to ask if the trustee selections are still valid. It's more important than in normal financial planning because the trustee may need to be more hands-on."

With all the decisions to make, parents would do well to take this one piece of advice from SNAP's executive director.

"Be compassionate with yourself," Kraus says. "Nobody wants to think about their own death. Lots of people don't plan for their own wills. These are hard decisions."

-- Posted: Oct. 24, 2001

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See Also
Personal trusts becoming commonplace
Common mistakes of estate planning
Common estate planning options

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