Financial Literacy - Families and Finance
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Planning for a special-needs child

Understand how government benefits work

Government programs such as Supplemental Security Income, or SSI, and Medicaid provide basic support services, but they are income sensitive. In the case of Medicaid, eligibility can vary from state to state.

In general, to be eligible for such benefits as SSI, a child must be disabled and have limited resources.

To begin with, special-needs children younger than 18 must have an impairment that meets the government's definition of disability, which is a physical or mental impairment that seriously affects the ability to function. In addition, the disability must have lasted, or be expected to last, at least one year or result in death to qualify for SSI benefits.

Many special-needs children won't qualify for federal benefits prior to age 18 if their parents make too much money. After age 18, to be eligible for SSI benefits, the adult child cannot have earnings that exceed a certain income threshold. Also consider that the adult child with special needs may be eligible for Social Security Disability Insurance benefits, which are based on a parent's earnings record.

In most states, if a special-needs child qualifies for SSI benefits, he or she usually can get Medicaid to help pay medical bills. Always check on Medicaid eligibility in your individual state, though, because even if the child is not eligible for SSI benefits, the child still may be eligible for Medicaid under other state rules.

Establish a special-needs trust

Special-needs trusts are established to manage assets for a beneficiary.

The assets are usually used to pay for rehabilitation, educational services or medical services not covered by other sources, but they can also be used to pay for quality-of-life enhancements, such as entertainment or vacations.

Special-needs trusts can be complicated and costly to establish, so it's a good idea to hire an attorney who is well-versed in estate law, taxes and government benefits -- particularly Medicaid and Social Security.

Costs can range from $2,500 to $5,000 or more to establish a special-needs trust depending on the circumstances and other factors, according to Vincent J. Russo, a Westbury, N.Y.-based attorney and co-founder of the Academy of Special Needs Planners.

Ideally, your attorney should have an extensive network of community resources because families often need help with quality-of-life issues beyond establishing the trust.

"It's not unusual for a parent to call me with concerns about a child having trouble with schooling or who is having a housing issue," he says. Oftentimes parents call him if they need a therapist or a financial adviser to help with managing assets or purchasing life insurance, he adds.

Selecting a trustee or guardian

Parents often look to siblings or close relatives when choosing a trustee or a guardian, but that's not always a good idea if they can't balance a checkbook or aren't parent material.

"With a trustee, you're looking for someone who has good judgment with money and who is responsible with certain things like investment management or tax returns," Greenberg says. "With a guardian, often it's the person that's best with the child."

In some cases, it may be a good idea to select two people to act as co-trustees, but you'll want to avoid choosing a husband and wife in case they divorce. Greenberg says it's a better idea to choose a relative from each side of the family.

Keep in mind that trustees don't have to be human beings; they can be financial or nonprofit institutions as well.

In cases where there are no related trustees to choose from, parents can transfer funds to a pooled trust run by a not-for-profit organization. This type of trust is managed for a number of different beneficiaries, with all funds kept separate from one another. The Web site of the Academy of Special Needs Planners provides a resource of pooled trusts that exist nationwide.

Determine how you will fund the trust

Special-needs trusts are commonly funded by the proceeds of life insurance policies, but they can also be funded by cash gifts or from investments such as retirement fund proceeds or IRAs if the IRA custodian permits it.

Well-intentioned family members often want to help by leaving money directly to their special-needs child.

Too often though, they make the potentially costly mistake of naming the child as a beneficiary. Even high-functioning individuals may not have good money-management skills. And as mentioned above, gifts willed directly to a special-needs child could jeopardize government benefits.

"Instead of naming a child individually, you should name the special-needs trust for the benefit of the child," says Cynthia R. Haddad, a member of the board of directors for The Arc of Massachusetts and a Certified Financial Planner based in Waltham, Mass.

Regardless of how the special-needs trust is funded, many experts recommend not funding it until the death of both parents. The funding of a trust can be accomplished through specific instructions left in a will, called a "pour-over will." This type of will "pours" specified property or assets owned at death into the trust that had been previously set up.

"That's more common of a planning strategy simply because once you've funded a special-needs trust and put money into it, you have to file a separate tax return," Haddad says. "It makes the trust irrevocable, and you really can't change anything."

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