If you have a special-needs child, you are entitled to certain benefits and programs that help to relieve the immense costs of your child's care. Long-term financial planning is essential to make sure that your child continues to receive those benefits when you are no longer able to provide care.

Leaving an Inheritance is a Mistake

The biggest mistakes you can make are to delay estate planning and to use standard strategies that could actually put your child at risk. For example, in order to qualify for Medicaid and other benefit programs, special-needs children may not have more than $2,000 in their own name. Parents and well-meaning relatives who give money to a disabled child -- either now or in their Wills -- could make the child ineligible for some benefits, creating the need to spend down the money and re-apply for benefits.

Some parents try to solve this problem by disinheriting their disabled child and giving the money to a sibling or family member who promises to care for the child, a solution that puts enormous stress on the sibling or family member and doesn't guarantee that the child's needs will be met.

Solutions

Any of several basic solutions, when set up, will allow your child to maintain eligibility for Medicaid and other state and federal assistance.

One is a Special-Needs Trust. This Trust is created in your Will, and acts as a receptacle for money earmarked for the child. It can improve the quality of life for a disabled adult without endangering eligibility for government programs. Typically, special-needs Trusts are designed so that none of the money can be used for food, clothing and shelter, all services provided by government programs but the money may be used for amenities government programs don’t provide, such as travel, entertainment, and recreation.

To create a special-needs Trust, you need professional help from both a financial planner who specializes in special-needs issues and an estate attorney knowledgeable about your state’s laws about providing for disabled children. Laws in every state are different.

To create a special needs Trust you must:

1. Write a letter of intent. This provides instructions on the care of your child for whomever you name as caregiver, whether it is one individual or a group home or other facility.
2. Name a trustee. This person will oversee the money in the Trust and will have the responsibility of investing it and use it to pay for your child’s needs. Be sure the trustee understands your child’s needs and, hopefully, will not charge a fee. If no family member is available, you may need to retain an attorney to act as trustee or name a non-profit community foundation.
3. Fund the Trust. You can set up a special needs Trust as part of your Will and arrange for some or all of your assets to go into it. Parents who fear they won't be able to leave enough money in the special-needs Trust can take out a term life insurance policy and name the trust as beneficiary.
4. Figure out how the money should be invested. The trustee is responsible for managing the money in the Trust, but you can leave instructions about how you want it invested.

Another solution, one that can be used simultaneously with a special-needs Trust, is an OBRA Supplemental Trust. OBRA stands for the Omnibus Budget Reconciliation Act of 1993, the law that changed the Medicaid rules pertaining to the transfer of assets.

COBRA has made it possible for a person who is disabled and under the age of 65 to remain eligible for Medicaid even if that person receives money or assets in excess of $2,000 from a direct inheritance, lawsuit, divorce settlement or other financial gain, if that gain is placed in a qualifying Trust. This type of Trust is also called a "payback" Trust because if any funds remain in the Trust when the beneficiary dies, the state is entitled to be paid back the full amount Medicaid paid on behalf of the beneficiary. Your attorney needs a thorough understanding of OBRA to help you set up this kind of Trust.

Where to get help

If you have a child with special needs, you should work with a local lawyer and financial adviser because laws and resources vary from state to state. Several new organizations make it easier to find special-needs planning experts, many of whom have disabled children themselves and can help you navigate the benefits system and find local resources.

• Special Needs Alliance – an invitation-only organization of about a hundred lawyers who focus on special-needs planning.
• www.specialneedsanswers.com – provides contact information for members of the Academy of Special Needs Planners in addition to state-specific information.
• A number of financial service providers offer special-needs planning. Examples are Mass Mutual’s SpecialCare program, MetLife’s MetDesk at www.metlife.com/desk, and Merrill Lynch’s special-needs financial services division at www.askmerrill.ml.com, (click on “Advice and Planning,” and then on “Special Needs Network”).