Financially Preparing for Special-Needs Kids

Sarah Palin's 5-month-old son, Trig, who has Down syndrome, has sparked a national conversation about kids with special needs: the extra care they require, available government benefits, and the pros and cons of prenatal testing.

One topic that has gotten less attention is the financial stress that parents often face. Many kids with special needs require financial support throughout their lives, and while government assistance often covers basic medical care, holding assets over $2,000 can make them ineligible. That means advance financial planning, through wills, estate planning, and trusts, can be essential to ensuring kids with special needs have the support they require once they grow up.

"If [parents] fail to deal with these issues now, it will jeopardize their child's quality of life down the road," says Tanya Harvey, an attorney who focuses on special-needs planning in the Washington, D.C., law office of Bryan Cave.

Here are tips from leading experts in the field of financial planning for kids with special needs on how to get started:

1) Establish legal guardianship. After a child reaches the age of 18, he is considered an adult. But some kids may still need a guardian, says Harvey. One of her tests includes asking whether a child would impulsively buy a pretty diamond in a store window. If the child shouldn't be held responsible for such a purchase, then he needs to have a legal guardian, or else the contract would be binding.

Karen Greenberg, director of Prosperity Life Planning, a nonprofit that teaches financial planning to families of children with special needs, along with her husband and associate director, Jaret Vogel, are urging Congress to adopt a special-needs tax credit that would help parents pay for the cost of establishing such a guardianship. Their proposal would provide up to $5,000 in tax credits to offset the cost of legal fees.

Families often can't afford to set up a guardianship, which involves court expenses and doctors' fees, so they don't do it, say Greenberg and Vogel.

2) Describe your child in writing. Greenberg recommends writing down a "minibiography" of children that could be given to any future guardians or caretakers. It should include medical information like allergies but also personal preferences, goals, and details about friends.

3) Protect your child's eligibility for public benefits. Medical care can be so expensive that even relatively wealthy families may need to rely on Medicaid and Social Security income. Because having more than $2,000 in assets threatens that eligibility, "you want to make sure that if your child is going to receive any money, that it's in a special-needs trust so it doesn't disqualify them," says Harvey. A lawyer or financial professional can help establish a special-needs trust, which doesn't count against the $2,000 limit. Money left to the child through a will should be directed into this trust.

Parents often choose to set up a trust that goes into effect when they die, says Harvey, to allow them flexibility to spend that money in different ways in the meantime. But families may be better off setting up the trust immediately if a grandparent wants to leave money to the child, for example.

Greenberg adds that another benefit to establishing a trust is that the money is then considered separate from the parents' assets, which protects it from creditors and divorce settlements.

4) Consider insurance policies. Life insurance that pays out upon the death of the second parent—often called "last to die" policies—can help parents ensure their child has enough money after they both die without straining their budgets too much beforehand.

When Greenberg, who has an autistic son, examined her budget several years ago, she decided to purchase such a policy. It pays out $650,000 on the death of Greenberg or her former husband, whichever comes second, for about $2,000 a year. In addition, for years, she tucked away about $400 a month into a special-needs trust, which now holds around $55,000. That means that if both she and her former husband were to die, their son would have the $650,000 life insurance payout and the $55,000 trust. Together, she calculates, that will generate an income of around $35,000 a year—enough to pay the bulk of his expenses.