If you are the parents of a child with special needs, such as a mental or physical disability, you face the challenge of providing for them while you are alive, as well as seeing that they are taken care of after you are gone. The expenses of caring for a family member with special needs can be overwhelming, and ongoing medical care may not be covered by private insurance plans. State and local governments offer assistance, but it is subject to strict financial eligibility requirements. So, what can a parent of a child with special needs do (or not do) to assure adequate care throughout their lifetime, yet not disqualify them from government assistance?
First, it is important that parents, grandparents and others NOT establish custodial accounts for a minor child with special needs. Why? Because once the minor child reaches adulthood, distribution from the custodial account may disqualify them from government services. A well-meaning grandparent’s act of generosity can actually do more harm than good.
The same disqualification applies if a child with special needs is left assets outright or through a trust. What about leaving money to a trusted relative to be held on behalf of a beneficiary? While that sounds like a reasonable plan, the relative could lose the inheritance through their own divorce, bankruptcy, lawsuits or simply by mismanaging the assets. In addition, should the selected relative die, the inheritance becomes part of the relative’s own estate.
Fortunately, the government has established rules allowing assets to be held for the benefit of an individual with special needs, in a “special needs” or “supplemental needs” trust. A special needs trust preserves government benefit eligibility, while at the same time providing assets that can meet the additional needs of the person with a disability that goes beyond provisions for the basic needs and limited medical and long-term support and services of Medicaid or Supplemental Security Income (SSI).
These life-enhancing expenditures can include: supplemental education and training; out-of-pocket medical and dental services; transportation (including purchase and maintenance of a vehicle); travel and vacations; hobbies and recreation; purchases such as computers, electronics, and furniture; personal care aide; athletic training and completion; and special dietary needs.
Most importantly, a special needs trust must be designed specifically to supplement, not replace public benefits.
Funds from a special needs trust cannot be distributed directly to the disabled beneficiary. Rather, funds must be disbursed to third parties who provide goods and services for the use and enjoyment by the beneficiary. Often, supplemental needs trusts are funded with life insurance proceeds, thereby providing resources exactly when they are needed.
Special needs trusts are a critical component of your estate planning if you have a child or grandchild with disabilities. Life can change in an instant. What are you waiting for?