Parents should take steps now to protect, provide for special needs

Most parents of special needs children realize their children probably will outlive them, yet nearly a third have made no plans for their child's financial future, according to a survey released earlier this year.

And while 60 percent of parents said their special needs child will require lifetime care, the majority hadn't even prepared a will, says Nadine Vogel, special-needs trust specialist.

For a child with special needs, the consequences of poor financial planning can be catastrophic. If you die without a will, your child may inherit some or all of your estate. A disabled individual with more than $2,000 in assets is ineligible for most government benefits, such as Supplemental Social Security and Medicaid.

While you may not like the idea of relying on the government to care for your child, most families have no other choice, says Ron Pearson, a Virginia Beach financial planner and father of two adult sons who have developmental disabilities.

Housing and medical expenses for a disabled adult who lives in a group home typically exceed $50,000 a year, he says. To generate enough annual income to meet those costs, you would need a minimum of $1 million in savings, he says.

A financial alternative that will preserve your child's eligibility for government programs is a special-needs trust, sometimes known as a supplemental trust. The money can't be used to pay for necessities, such as food and shelter, but it can be used for non-essential expenses, such as vacations, DVD's and movies.

To prepare a special-needs trust, you'll need professional help. Some financial planners specialize in special-needs issues; many are parents of children with disabilities. Some large financial services firms have divisions devoted to special-needs families.

You'll also need an attorney who is knowledgeable about your state's laws. Advocacy groups, such as The Arc, can suggest qualified professionals.

Important components of a special needs trust:

A letter-of-intent. This document tells your child's trust administrator and guardian everything about your child, for his medical history to his favorite foods. It can play a critical role in maintaining your child's quality of life after you're gone.

Theresa Varnet, a Northborough, Mass., attorney who specializes in disabilities law, has written an 18-page letter of intent for her 38-year-old daughter, Jennifer, who is developmentally disabled. The letter chronicles Jennifer's medical history from when she was 3 months old. It lists every doctor she's ever seen, and the name and phone number of the van driver who picks her up every day for work.

The letter also notes that Jennifer loves to swim and that swimming is a healthy exercise for her heart condition. Without that information, a trustee might think Jennifer's swim club membership is a frivolous expense, Varnet says.

Once you've completed your letter of intent, update it every year. Some people do it on their child's birthday. Pearson recommends doing it on Groundhog Day, "Nobody is ever hung over from groundhog parties, and it's something everybody remembers," he says.

Updates are necessary because your child's needs and desires change over time. For years, Pearson's sons went to the local Wal-Mart every Saturday and used their paychecks to buy country and western CDs. "Then I called one time, and they're listing to the Beach Boys," he says.

Choose a trustee to manage the trust. The role of trustee is critical in protecting your child's financial security. The individual is responsible for managing funds in the trust and spending the money appropriately.

Special-needs trusts are frequently audited by government agencies, so pick someone who will keep meticulous records, Varnet says. Otherwise, your child could lose eligibility for government benefits.

Some parents hire an attorney or other professional to act as trustee; others ask a family member with good financial management skills to take the job. Another option; a local community trust managed by volunteer trustees. Many chapters of advocacy group The Arc offer these trusts, Pearson says.

Your child also will need a guardian to handle personal and legal affairs. Many attorneys who handle special-needs issues advise against asking the same person to serve as trustee and guardian for your child, Vogel says. A relative who will serve as a strong advocate and caregiver may not be a good money manager. "The thought behind it is that the trustee thinks with their head and the guardian thinks with their heart", she says.

Figure out how you'll fund the trust. Many parents of special-needs children have numerous demands on their finances, such as college education for other children and retirement savings plans. Add in the cost of caring for a disabled child, and there's often not much left for a special-needs trust.

"Unless you have complete financial security yourself, funding a supplemental-needs trust isn't the most appropriate thing to do", says John Nadworny, a financial planner in Waltham, Mass.

Many families arrange for the trust to inherit their estates when they die, he says. Another strategy is to buy a life insurance policy and arrange for the proceeds to go to the trust.

Some parents purchase "second to die" policies, which don't pay out until the second parent dies. There are pros and cons to these policies, so it's important to discuss them with a qualified planner.

Some parents of special-needs children invest in rental property that will provide income for the trust and a place for their child to live. Nadworny, whose son, James, has Down syndrome, owns two rental properties. He plans to buy a five-unit building where James will be able to live someday. Income from the units will pay for someone to care for him.

Securing future for a disabled child
Where to get more information:

1. The Arc of the United States, www.thearc.org. Represents people with mental retardation and their families. Phone: 301-565-3842.
2. Special Needs Alliance, www.specialneedsalliiance.com. A network of lawyers who specialize in disabilities law.