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Creating a Secure Financial Future for Children with Special Needs

If you have a child with special needs, no doubt you have concerns about how to provide for your child as he or she grows up and you age. It makes a great deal of sense to devote time sooner, rather than later, to evaluating your options, developing a plan and seeing it is implemented.

Options

In considering how you set aside funds to help make life easier for your child, you should begin by performing a cost-benefit analysis of each of your options. Different vehicles may be used, but the question generally comes down to the pros and cons of (1) the special needs child’s capacity for managing assets, (2) the involvement of a sibling or other family member, and (3) protection against the loss of government benefits.

If the child is likely capable of managing his or her own assets, then a direct gift or bequest is an option. This is certainly the simplest and least expensive plan to put into place. It does not require the participation of a sibling; and such participation may be a burden to the sibling. It does, however, put the child at risk for losing valuable federal and state benefits. The special needs child’s assets and income may disqualify him or her from receiving benefits, once he or she is no long a minor, given that eligibility is based directly on those.

If the child is not capable of managing his or her own assets, parents often choose between providing for the special needs child via a sibling or establishing a special needs trust. While direct gifts to the sibling are, as previously mentioned, a less expensive option than establishing a trust, amounts gifted to the sibling may be at risk if that person faces divorce or litigation. To protect against this unwanted outcome, parents often choose to establish a trust.

Establishing a Trust

The process for establishing a special needs trust is relatively straightforward.

An estate planning attorney with expertise in special needs trusts will help the grantor (the parents or grandparents) establish the trust for the benefit of the person with special needs.

The grantor designates an independent trustee to carry out the provisions of the trust.

The grantor establishes the trust with a gift (which reduces the grantors estate tax liability by removing the assets from the grantors estate) or with a bequest (which earmarks certain assets for the benefit of the special needs child but does not remove the assets from the estate, and therefore does not reduce the estate tax liability).

The trust may then be funded with a variety of assets, including equities, real property, IRAs and life insurance, to name a few. Typically, special needs trusts are funded with liquid assets to facilitate cash payments to address the beneficiary’s needs.

Distribution of assets can be made to healthcare and other specifically-approved goods/services providers (a fairly broad list) without giving income directly to the special needs child.

A special needs trust may be a very useful part of the overall financial plan of those who wish to provide for the special needs child, and should be considered within the context of providing for all heirs in a way that makes sense for the family.

Another Option

A recent development and potentially very functional supplement to special needs trusts – or an alternative to them for smaller account balances – is the creation of ABLE accounts. These are tax-advantaged savings accounts for individuals with disabilities and their families. Eligibility is limited to individuals with significant disabilities whose onset was before the child’s turning 26 years of age and contributions are limited to $14,000 by all participants (family and friends) per tax year.

For information on services and support for people with intellectual and developmental disabilities and their families, thearc.org is a helpful website.

To review details on government benefits, see the Social Security Administration’s publication, “Benefits for Children with Disabilities” on their website ssa.gov/pubs/EN-05-10026.pdf.

Judith Frost is a Financial Advisor with Morgan Stanley Global Wealth Management in West Hartford. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley Smith Barney, LLC, member SIPC.

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