The facts and figures are staggering: nearly 54-million people in
America cope with special needs and the rising expenses related
to some form of disability—whether cognitive, developmental
or physical—according to the National Organization on Disability.
The rise in cases of certain disabilities may be on the verge of
creating a national health crisis. Autism, for one, drains the economy
of $35 billion a year according to a recent Harvard School of Public
Health study. The Harvard research also indicates that the lifelong
bill for one autistic individual, from birth until death, could
reach as much as $3.2 million.
Despite these alarming numbers, once a disability is diagnosed,
early planning helps families add to and protect the assets of a
special-needs individual, preventing the loss of critical benefits.
One effective way to protect a loved one is through a special-needs
trust.
To Preserve and Protect
Special-needs trusts (SNTs) were created to manage resources while
protecting an individual’s eligibility for vital public assistance.
Establishing an SNT may also prevent court intervention by eliminating
the need to appoint a guardian to manage the disabled individual’s
assets. SNTs are designed to pay for items—such as education,
alternative therapies, counseling and vacations—which go beyond
the simple life expenses covered by government benefits.
There are two basic types of SNTs: the third-party special-needs
trust and the first-party special-needs trust. Third-party SNTs
commonly are created by a parent or other family member for a child
or adult with special needs. These SNTs require no government paybacks
and allow the beneficiary to receive gifts, lawsuit settlements
or other funds without losing their eligibility for certain government
programs.
When the disabled individual establishes the trust for himself,
it is referred to as a first-party or self-settled SNT. These SNTs
permit the disabled person to protect his or her assets from creditors
and can help to reduce total assets for tax or Medicaid planning
purposes. Three types of first-party trusts exist. Pay-back trusts
are available for disabled individuals under age 65 and require
payback for government assistance upon the death of the disabled
individual. Secondly, qualified-income trusts are funded solely
by an individual’s income—such as a pension or social
security. They have no age or disability restrictions, but require
government paybacks. Lastly, not-for-profit pooled trusts have no
age or government payback requirements if the amounts remaining
at the disabled beneficiary’s death remain in the trust for
the benefit of other disabled beneficiaries.
One very important fact to remember: it is critical to plan for
the SNT before the disabled individual receives assets in his or
her own name. Many parents incorrectly assume that their children
qualify for government benefits simply because they are disabled.
The eligibility for government benefits is based on their parents’
income and assets. However, when these children reach a certain
age (usually 18), eligibility is based primarily on their own income
and assets rather than those of their parents. If the disabled person’s
assets (excluding certain items, like a home or car) exceed $2000,
the government will discontinue benefit payments until any extra
money has been accounted for.
Where to Turn
When it comes to funding your SNT, first assess your savings goals
for lifetime care expenses. The Academy of Special Needs Planners
offers useful calculators and checklists on its website, www.specialneedsanswers.com.
You may also want to hire a life-care planner to develop a comprehensive
assessment of current and future care needs and make recommendations.
Life insurance is often the best source of SNT funding. It requires
a smaller initial outlay and the proceeds are received as tax-free
income and often as a tax-free estate. SNTs can also be funded with
proceeds obtained by the beneficiary through court proceedings,
inheritances, life insurance claims, settlements or gifts.
When it comes to special-needs care, early planning is essential.
Speak to your trusted Financial Advisor for further counsel on this
issue.
