Special-Needs Trust: How to Ensure the Care of Your Disabled Child

A special-needs trust can take some worry out of raising your disabled child, as it helps ensure that he or she will continue to qualify for government assistance programs.(ISTOCKPHOTO/HEALTH)

Caring for special-needs children can be very expensive. Some parents are prepared to spend a small fortune to provide food, shelter, and medical care for their special-needs kids. But what if the care becomes unaffordable? And who will take over when the parents are no longer around?

"People with disabilities are now living long lives," says Chris Cooper, a certified financial planner in Toledo. "They're living into old age and getting old-age problems like Alzheimers and arthritis, so they're dependent much longer." In conjunction with government assistance, a special-needs trust can ensure that your child is set for life.

What is a special-needs trust?
A special-needs trust, also known as a supplemental trust, is a safe place to park assets for your disabled child. First of all, the trust is protected; if you are sued, go through a divorce, or have your will contested, the funds cannot be touched and there will never be an interruption in available money for your child. Second, by giving money to the trust rather than directly to your child, he or she will continue to qualify for government assistance programs. "You can give money in such a way that the state doesn't view it as an asset or a resource," Cooper says.

How does a special-needs trust interact with government programs?
Many children with special needs—a category that comprises a wide array of medical, behavioral, developmental, learning, and mental-health conditions—qualify for government assistance programs such as Medicaid, which covers most medical services and housing, and Supplemental Security Income, which provides a monthly stipend for basic living needs. These programs are administered on the state level; though eligibility requirements vary, in most states your child cannot have more than $2,000 in assets. If you or a relative bequeaths more than that to your child, it should be placed in a special-needs trust; otherwise he or she can be disqualified from government programs.

How do I set up a special-needs trust?
Initiate the trust as soon as you determine that your child may not be capable of supporting himself. If your child's development improves and he is able to earn a living, great—the trust can always be dissolved and the funds returned to you or given to the child. Special-needs trusts are complicated animals, however, and rules vary from state to state. You should find a financial planner who deals specifically in this area of the law.

How do I fund the trust?
Although you can fund the trust with your estate or the proceeds of a life insurance policy, Ron Pearson, a certified financial planner in Virginia Beach, Va., who specializes in families with special-needs children, recommends that you do it throughout your lifetime. Should you die unexpectedly, the trust will already be operational and able to provide your child with money. You should also inform your extended family about the trust so that relatives don't inadvertently disqualify your child. Aunt Edna's thoughtful $10,000 inheritance should be left to the trust, not the individual.

How will my child use the trust?
The money is doled out by a trustee, either yourself or someone you designate. The funds can be used anytime, not just after your death. For instance, you might make use of government programs to provide basic expenses like medical care and housing, while using a special-needs trust for "enhanced care that improves the quality of life," says Pearson. Pearson, the father of two developmentally disabled sons who live in a group home, says he gives his sons money from their trusts that they mostly spend on country music CDs. You could also use the money for medical equipment or care that Medicaid doesnt cover.

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