Estate planning when you have a child with special needs
For parents of a child with a disability or chronic illness, estate planning means thinking about their future care as well as your own.
For many families, caring for a special needs child includes getting them qualified for Supplemental Security Income (SSI) and Medicaid.
Generally, the individual must have less than $2,000 in countable asset to qualify for those services. If a family member dies and names a disabled adult child as beneficiary, that gift can jeopardize the recipient’s ability to access public benefits.
Getting bumped out of those programs isn’t just costly. It can be wildly disruptive for the individual and their caregivers, who have to spend down such gifts before reenrolling in government programs.
In some cases, the individual could lose coveted placements as they’re relegated to the bottom of government waiting lists.
That’s why it’s critical that family assets intended for a disabled individual be held in specialized financial tools like a special needs trust. A special needs trust is a legal vehicle that allows a disabled or ill adult to receive income without reducing their eligibility for public assistance benefits.
Money in a special needs trust can be used to provide quality of life enhancements that are not covered by public assistance. Resources in a special needs trust may be used for a variety of essential needs, such as caretakers, out-of-pocket medical expenses, mobility aides, or the cost of transportation. Funds can also be used for extras, including a cellphone, a new computer, or other comfort items and interests.
There are two main types of special needs trusts:
- Self-funded or first-party trusts: These trusts allow the disabled individual to place their own funds into trust while still maintaining SSI and Medicaid benefits. After the individual dies, any remaining money goes to help reimburse the state for the cost of their care.
- Third-party trusts: As the name implies, these trusts are funded by someone else for the benefit of the disabled individual. They are typically funded with inheritances, gifts, or proceeds from a parent’s life insurance.
Special needs trusts must be established before the beneficiary turns 65. They must be set up carefully to ensure they’re valid and that the directives are clear. The trust is managed by a trustee who follows trust directives in the best interest of the beneficiary.
Be sure to consult with an estate planning attorney when establishing a special needs trust. An attorney can help you understand if or how public benefits could be affected by certain distribution instructions. Proper estate planning can also help ensure your own secure retirement while determining the best way to fund the trust.
Whereas traditional retirement plans tend to get more conservative as you age, planning for a disabled child means you still need long-term growth. A conservative asset mix may not keep pace with inflation and supply the growth you need to meet that child’s future needs.