Providing Financial Security for Children with Special Needs

If you care for a child who is physically or mentally disabled, you know how much time and attention is required. More likely than not, you've been up late at night, worrying about what would happen if you were no longer around. Who would take care of your child? Who would make sure their needs were met?

Planning for the future can help alleviate those worries. First things first: finances. Number one on your list should be something called a special needs trust, otherwise known as a Supplemental Needs Trust, or SNT.

Why an SNT rather than a regular old bank account? Most people with physical and mental disabilities depend on government assistance in the form of Social Security, Medicaid, and other government benefits, such as continuing education and training programs available in some states. Establishing an SNT can help make sure they continue to receive assistance. Laws can be tricky things. Here are a few points to keep in mind when it comes to providing for a special needs child:

Remove Them From Your Will: Yes, it sounds harsh, but it's practical. Federal law stipulates that a special needs individual cannot have assets of more than $2,000 in total. That means you should not name your special needs child as beneficiary in your will, life insurance, or retirement fund. Instead, all benefits should be assigned to the SNT.

Make It Official: An SNT should be drawn up by an attorney who specializes in this type of estate planning tool and it should be reviewed by the Social Security Administration, to make sure it's in line with special needs trust law. You'll also need a trustee – either an individual or an institution. They'll oversee the funds in the trust and make sure the money is used wisely. If your child is too young to make big life decisions, you should also appoint a guardian.

Decide How Much: While basic living and medical expenses will be provided by government benefits, it's not like they'll be springing for toys and ice cream. For a child, it's the little things that make life sweet. Make sure you stock your trust with enough funds to cover impulse items. And don't forget quality of life items like personal care attendants, out-of-pocket expenses, rehabilitation, and goods and services that make life more pleasant. Estimate how much you spend on your child currently, then factor in projected future costs, along with his or her life expectancy.

Figure Out How You'll Pay: After establishing the approximate size of the trust, the next question is how to fund it. One common way to fund an SNT is with life insurance. You can also foot the bill with investments, retirement plans, real estate, and other assets. Just be careful not to drain funds that you may need yourself. It's important to assure your own financial well-being for as long as you are alive, since you will continue to be the caregiver. Review your plan regularly, particularly after major life events, such as births, death, divorce, and marriage.

Write It All Down: In addition to your financial plan, meet with your legal advisor and draft a letter of intent with instructions to trustees and guardians outlining issues like health care, education, living arrangements, and other items. As a parent, you know your child best. Take the time to write down what's important for their upbringing, just in case you're not there to see to it yourself.

Steven J. Musmanno, MBA, is a partner of Professional Planning Services, LLC and offers securities through AXA Advisors, LLC (member NASD, SIPC).