Protecting special needs kids financially

More than 56 million Americans have some type of disability, according to the Census Bureau. Autism, for example, affects one in 50 children. For parents of a child with a disability, the great fear is: "What happens when we're gone?" One answer: Set up a trust for the child. Here is how:

To support a special-needs child during and beyond your lifetime requires truly special planning. Not only are there more costs and uncertainties but also heavier emotional weight.

Many families simply avoid the process: Only 21% of parents with special-needs kids say they are familiar with the planning steps, even though most worry about their children's lifelong financial security, according to a 2011 survey by MetLife Center for Special Needs Planning.

(The MetLife survey reports some caregivers do tackle planning today: 38% have a will, 36% have planned for future housing for their special-needs dependent and 32% have identified a trustee. Those percentages are up from a similar survey in 2005.)

People don't address the issue because they feel too overwhelmed, says Ken Prodger, president of Special Needs Planning Group in Sunnyvale, Calif. Once they start planning, he says, they feel much more relieved. "The parents feel a lot more confident with the day-to-day challenges, knowing that they have this," Prodger says.

One important piece of the planning puzzle is special-needs trusts, which allow families to prepare funds for children with a disability while maintaining eligibility for such government benefits as Supplemental Security Income (SSI) and Medicaid. Leaving money directly to or naming children as the beneficiary of insurance policies can disqualify them from receiving benefits.

Special needs trusts guarantee the funds are only used to provide for the disabled child. If the child is not able to manage money, some parents choose to leave funds to other sons and daughters to take care of the disabled sibling. Even if the sibling or another family member will take on such responsibility, the money can still be lost in a divorce or to creditor problems, to cite just two examples.

When setting up a special-needs trust:

1. Know what type of trust you need. Two kinds of special-needs trusts exist: self-settled and third-party. If a disabled child creates his or her own trust, it's self-settled. Parents of disabled children create third-party trusts.

Self-settled trusts have a payback provision, meaning the government can collect the trust's assets after the beneficiary dies to reimburse for benefits. Third-party trusts carry no such provision – and therefore you likely much want a third-party trust.

Under federal and state laws, benefits generally cut off if the special-needs recipient has more than $2,000 in assets. If the special-needs children already have assets under their names – perhaps from an inheritance or lawsuit settlement – a self-settled trust best holds those assets. You can still maintain a third-party trust on the side for other funds the government can't claim after the trust ends.

2. Choose a trustee. This overseer distributes the trust funds to your child. Advisors suggest a combination of a family member and corporate trustee: The family member understands the child's needs and the corporate trustee has expertise to manage the funds.

First criterion for the family trustee is whether he or she loves the special-needs child, says John Nadworny, advisor at Shepherd Financial Partners in Winchester, Mass. If no family member is suitable, a professional trustee is fine, says Nadworny, adding that parents sometimes postpone setting up a trust because they don't know who to choose.

One family he works with, for example, has a son with bipolar disorder whose aggressive behaviors make the relationship with his sibling distant and strained. In this case, says Nadworny, a professional trustee is better.

Siblings of the child are usually the choice if they have a good relationship, says Richard Courtney, president-elect of the Special Needs Alliance. Having to ask siblings' approval for using the money may create conflicts and resentment in the beneficiary with special needs.

"We have to carefully examine different personalities and how the family dynamic works," says Courtney. "Family members need to put their personal emotions aside and decide what's best for the child."

3. Plan for funding the trust. Parents' life insurance policies often fund the trust, as do retirement accounts or real estate.

Family members may pour over assets into the trust once it is set up – a common mistake. A special needs trust is not for saving but estate planning. Put a cost number on services your child needs, such as housing and long-term care.

How much will you pay for medical services? Can your child work? How long must the money last? (Realize that some disabilities shorten life expectancy.)

4. Inform other family members. Families sometimes neglect to tell other family members about the trust or, crucially, educate them how it works. A grandmother, for example, might leave a hefty inheritance to her special-needs grandson – and unwittingly disqualify him from SSI and Medicaid.

5. Do test runs. Make sure everyone knows the rules of maintaining a trust. If the trustees you choose simply do not fit, train them to do a better job or replace them.

Prodger offers the example of a brother serving as trustee of his younger brother who developed mental illness in adulthood. Their mother asked her older son to use her money in the trust to buy a new iPad for his younger brother, who broke the first one.

The older brother refused, saying he wouldn't buy his brother a new device until he learned how to be more careful. The mother had to intervene and educate the older son (who didn't grow up with a special-needs sibling) about his younger brother's condition.

As in all financial planning, each case is unique – but even more so for special needs planning, says Shepherd's Cynthia Haddad. The planning requires time, effort and constant expert guidance.

The work pays off for all parties when you know you give your child a secure future. "I get hugs and kisses after doing (this) planning," Haddad says.

Cherice Chen is a member of the AdviceIQ Financial Advisors Network, which is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.