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Planning For the Future
with a Special Needs Child - Part 3
The Balancing Act

By  Harry S. Margolis and Eric Prichard 

 

Planning for your own long-term care when you have a child with special needs requires a delicate balancing act between establishing your own financial position to ensure a comfortable retirement and making sure that your child's needs are protected, both while you are alive and after you are gone.  Most parents of children with special needs will immediately think of what they should do to protect their children's future before concentrating on their own needs.  However, there are ways for parents to accomplish both goals at once, through careful estate and special needs planning.  By working with a well-qualified attorney and financial planner who specialize in helping families with special needs, a caregiver can establish a child's security for life while making sure that she will be well cared for when the parent needs his own cane to lean on further down the road.
 
In the preceding two parts to this series, we explored the tools available to parents of special needs children to provide for the long-term medical care, housing, and financial assistance the children will require as well as the tools available to parents looking to provide for their own long-term needs into and beyond retirement.  With this tool bag at their disposal, parents now need to decide how to balance these long-term needs throughout their lives.
 
Plan for Yourself, as Well as Your Child
 
Even though many caregivers who spend their entire lives taking care of others do often neglect themselves and their own care to the point where they reach old age and have nothing left to spend, having a child with special needs does not mean that you have to sacrifice your own future care.  By planning now, before you need long-term care, and integrating your long-term care plan with your child's special needs planning, you will be able to guarantee your child's future comfort while resting assured that you will be taken care of with the same love and affection you give to your child.  
 
Funding Your Child's Future
 
A trust functions much like a box—you can dress it up with a lot of bells and whistles, but when it comes down to it, its real job is to hold funds for your child's benefit.  A trust without funds is merely an empty box.  Having taken the first steps of creating the proper planning instruments (and looking into your own care in the process), the next step is using these new tools in the best possible way.
 
There is no generic dollar value every family should contribute to a trust.  Instead, you should meet with a financial planner who specializes in planning for families with special needs children to work out a plan for the future.  These plans first focus on the child's potential needs for the rest of his life in areas like housing, medical expenses, transportation, caregiver expenses and education.  Once you determine what your child might possibly need, planners assign a dollar value to those expenses.  By factoring in your child's projected income and life expectancy, planners then come up with a ballpark suggestion for funding the trust. 
 
When families lack the assets necessary to fully fund a supplemental needs trust, life insurance can be a great way to guarantee a child's future without having to sacrifice a lot of income.  With proper planning, policies can be structured to flow into your child's supplemental needs trust after you are gone, guaranteeing full trust funding.  There are several kinds of life insurance products available for people looking to fund a trust:  whole life insurance, which builds up value as you contribute premiums over the years; term life insurance, which provides coverage for a certain period of years with an option to extend the policy when the term runs out; universal life insurance, which provides the ability to adjust premiums and benefits over time; and survivorship insurance, which is a policy on two people (typically spouses) and pays out only on the death of the second to die.
 
Many planners recommend using survivorship insurance to fund a supplemental needs trust because of the lower premiums, flexibility in choosing whole or universal plans, and potential tax benefits.  However, using survivorship insurance can sometimes backfire after one spouse dies and the second spouse discontinues the policy because she cannot afford to make the premium payments on a reduced income.  If this could be problem for your family, term insurance provides a suitable alternative, offering the guarantee that the trust will be funded should you pass away during the policy term.
 
Pre-funding the Trust
 
While most estate planning, whether for a child with special needs or for anyone else, anticipates that the plan will be funded when the parents die, pre-funding a trust for a child with special needs can help ensure that the funds will be there.  This is especially true if the parents feel they cannot afford to purchase long-term care insurance or are turned down for insurance due to their own physical condition.  By transferring funds or a life insurance policy into an irrevocable supplemental needs trust, the parents give up ownership, meaning that the property in the trust need not be spent down for the parents to qualify for Medicaid should they require nursing home care.  The only caveat here is that the trust must be funded at least five years before any application for Medicaid.  While this pre-funded trust is the ideal course to provide the most flexibility to the beneficiary and future trustees because it allows other children and grandchildren may be beneficiaries in addition to the child with special needs, there is a more aggressive option available, though it is rarely recommended by qualified planners.   
A pre-funded supplemental needs trust does not have such a requirement and can hold funds for a child's future needs while allowing them to qualify for many types of public benefits.
 
When All Else Fails
 
If a parent needs Medicaid coverage, he can transfer funds into a trust “solely for the benefit” of the child with special needs on the eve of applying for benefits.  This provides very little flexibility, and many states require a “sole benefit” trust to name the state as ultimate beneficiary. 
 
As mentioned, it is rarely recommended; but should you avoid taking any long-term care planning steps now and find yourself in immediate need of care (which can sometimes happen after a catastrophic accident or unforeseen illness), there is one way to immediately spend down your assets in order to qualify for Medicaid coverage of long-term care.  The government allows a Medicaid applicant to transfer assets, without penalty, into a trust set up solely for the benefit of a person who suffers from a disability.  If you find yourself in this situation, you can give away the majority of your assets, qualify for Medicaid, and rest assured that those funds will be used appropriately for your child's care as they grow older. 
 
This vehicle can also provide a planning opportunity if a grandparent of a child with special needs requires long-term nursing care.  He can also transfer funds into a trust solely for the benefit of the grandchild and qualify for Medicaid to cover his care.  It is important to note that states differ in their interpretation of what “solely for the benefit of” means, and it is important to work with an experienced local attorney to make sure the trust qualifies for the exception to the usual Medicaid penalties for transferring assets.

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