"Special needs" people need special financial planning

Nicolas is a child with cerebral palsy, a disability that will affect his movement, posture and coordination his entire life. His grandmother wanted to leave him a sizable inheritance. His mother told her not to.

Nearly 58 million people nationwide over the age of five identify themselves as disabled -- the largest single minority in the country. Millions of Americans would like to reach out and assist them, particularly at this time of year. 

But giving money directly to a special needs child or adult, particularly if they're already receiving government benefits, can be a bad idea. If these individuals have more than $2,000 in their own name, they could lose the government benefits they already receive and endure a big hassle getting them back.

Since most federal and state benefits are "needs based," the government is always looking over the shoulder of special needs persons. If it discovers that they have assets above the allowable limits, their benefits could be cut off. So instead of giving a lump sum of cash to a special needs person, such as a child with autism or a host of other permanent disabilities, the money must be doled out in ways that won't violate legal requirements.

This is crucial because children with disabilities like Down syndrome, which once resulted in premature death, now have a much longer life expectancy. And that's giving parents and caregivers looking after dependent children or adults a new worry: The dependent person will probably outlive them but still need care throughout their life.

Previously it wasn't uncommon for parents to simply disinherit these children, often thinking it was better if they were sent to live in institutions. But a wiser generation, coupled with the closing of most institutions, changed that. Now, many special needs adults live independently or in homes where they only have a minimum of assistance.

But this doesn't mean their government payments are enough to cover everyday needs. "These public benefits provide no more than 'bare bones' necessities," according to MassMutual, a Springfield, Massachusetts-based life insurer that also provides advice and assistance to families with special needs individuals.

So it's necessary to plan ahead. And you'll find several ways to funnel money to special needs people throughout their lives without causing them to lose their federal benefits.

One way is to establish a "special needs trust" with the explicit purpose to "supplement, not supplant" federal and state assistance programs and create a better quality of life for this individual. The trust can provide for special medical equipment, eyeglasses, even a trip to Disney World with a caregiver.

A myriad of rules and regulations are involved in creating and maintaining such a trust. One is that the beneficiary -- the special needs child or adult -- can't actually own the trust. A trustee or "third-party provider" who dispenses the money must be appointed. "At the heart of these rules lies the fact that the trustee can use the money to improve the quality of life for the dependent, but never distribute the money directly to them," said Kelly Piacenti, MassMutual's head of Special Care.

Another is that all family members should know about the trust. Sometimes this can be difficult because the challenge of having a special needs child can tear families apart, and their divorce rate is very high. That creates a financial challenge in itself. "So grandparents, family members and friends who wish to provide gifts should be told to give them to the special needs trust," said Piacenti.

What about crowdfunding? "Websites such as GoFundMe have increasingly been used to raise money on behalf of individuals with special needs," said Stephen Dale, a disability rights advocate who has his own California law firm. But without planning, such funds can "wreak havoc" with Social Security's Supplemental Security Income (SSI), Medicaid, food stamps and Section 8 housing, which provides federal rental assistance to low-income tenants. Crowdfunding -- where people don't know who else is giving or how much -- can easily put the special needs person over the limit, Dale said.

An important part of any estate plan for the future of a special needs dependent is a "letter of intent" defining what the guardian wants to happen later on. Piacenti describes this as "like a note to a babysitter, except on steroids," laying out everything a special needs person requires, their history and what both you and the person want in the future. It's a comprehensive document that can even include items as small as how to brush their teeth and as major as their future housing.

But a special needs trust isn't the only way to help a special needs dependent. Families can also set up an ABLE (Achieving Better Life Experience) account that will now allow contributions to a maximum of $15,000 annually, provided the person is diagnosed as disabled prior to the age of 26. 

Again, there's a maximum -- $100,000 -- that can be put into this account before the disabled person loses his or her government benefits. An ABLE account can be used for a host of expenses, including education, employment training, health, legal fees and, ultimately, funeral expenses.

It makes sense to hire an experienced attorney who handles special needs individuals and is familiar with trusts to help with planning for the future. But as a starter, parents and guardians can go to Nolo or another online legal website to review what's needed. Insurers like MassMutual also offer help.

These are some of the mistakes parents and caregivers make when planning:

Disinherit your dependent with special needs. Many people with special needs rely on government benefits to help provide food, shelter and medical care. If you've been advised to disinherit your dependent, remember that these public benefits provide no more than bare bones necessities.

Have assets in your dependent's name. To qualify for government benefits, such as SSI or Medicaid, a person cannot have more than $2,000 in assets, in most states. If you leave funds or convertible assets directly to your special needs dependent, they may have to be "spent down" to qualify for these important benefits.

Relying on your other children to take care of their special needs sibling. You may be thrusting a moral obligation on one sibling to become the future caregiver of their special needs sibling. Shouldering this type of burden can cause resentment. If the caregiving sibling gets married, would taking care of their brother or sister interfere in their lives? Will the spouse understand?

Leave money to your other children to support their special needs sibling. The funds could be lost forever if the caregiving sibling dies, gets divorced, sued, goes bankrupt or just mismanages the funds. Also there's no accounting here, and money can be used for other purposes by a spouse or child.

Have a 529 College Savings Plan or savings bond in your dependent's name. If these total more than $2,000, your special needs dependent could be ineligible for government benefits.