Trust planning for children with special needs: when government benefits aren't so beneficial

Exceptional Parent, The, Nov, 2007 by Billie M. Castle

Parents planning for the financial security of children with special needs are often told that maintaining their child's eligibility for government benefits should be of primary importance. In many cases, that's good advice--particularly if parents have limited resources and if the child could require costly medical care over a long-term basis. A special needs trust is a frequently used tool for managing assets for a child with special needs after the death of the parents, while preserving public benefits. A special needs trust permits distributions for such things as attendant care, education, travel and recreation, computer equipment, and other items and services that can greatly enhance the quality of life of the beneficiary with disabilities but typically does not permit distributions of cash or other items that would result in ineligibility for public benefits.

Special needs trusts, by their nature, limit the child's access to the trust funds and restrict the types of distributions that can be made from the trust. However, in some cases it may be in the child's best interest to have greater access and control over the funds, even if that means eligibility for public benefits will be lost. Before deciding to use a special needs trust, the specific provisions of the trust and their effect on eligibility for government benefits should be carefully weighed. The correct course of action depends on the unique circumstances of the parents and their child, in particular the financial resources of the parents and the child's medical condition.

This article offers a brief overview of government benefit programs and examines some of the important points to consider when planning for the future of a child with special needs.

Government Benefit Programs: An Overview. Children with special needs can become eligible for several government benefit programs.

SSI and Medicaid. When the child reaches age 18, he or she can become eligible for Supplemental Security Income (SSI) if the strict income and resource requirements are met-essentially, no more than $2,000 of assets (not including such things as a house and one car) and a limited amount of income. For 2007, the federal monetary benefit for a single individual is a rather modest $623 a month. Many states also pay a supplement, although typically this is just a fraction of the federal benefit. But the bigger benefit from SSI eligibility is often the automatic eligibility for Medicaid, the joint federal/state program that pays for medical care for financially eligible individuals with disabilities.

SSDI. When either of the child's parents dies, retires, or becomes disabled after having accrued sufficient Social Security employment credits, an adult child's benefits may change from SSI to the Disabled Adult Child (DAC) program. Unlike SSI, the DAC program is not based on need. Rather, the child's benefits are based on the parent's earnings record. Typically, the child's monetary benefit increases. Moreover, the child will automatically become eligible for Medicare benefits (regardless of the child's income or assets). If the child's SSDI income is low enough for the child to continue to receive at least one dollar of SSI income each month, the child would also continue to be eligible to receive Medicaid benefits (which can supplement Medicare coverage).

Children with special needs may also become eligible to receive housing assistance under a program administered by the U.S. Department of Housing and Urban Development (HUD). Beneficiaries living in HUD-qualified housing spend only a third of their monthly income on rent. For an individual receiving $623 a month from SSI, a monthly rent limited to just $208 is a substantial benefit.

Important Considerations When Planning for the Future for a Child with Special Needs. When considering the best way to secure an optimal quality of life and maximum financial security for a child with special needs, two key factors often determine the appropriate strategy:

* How much money is available to help care for the child? Is sufficient money available to help care for a child for the reminder of his or her life? Or will government benefits be needed at some point to cover living expenses, medical care, or both?

* What is the medical condition of the child? What is the current condition and long-term prognosis? What is the likelihood that government benefits will be required to pay for potentially costly medical care?

For parents with sufficient resources and children who are unlikely to require costly medical care, the eligibility requirements of government benefits programs can be overly restrictive. Needs-based programs limit beneficiaries to a total of $2,000 worth of countable assets. Moreover, income from a trust can reduce benefits on a dollar-for-dollar basis.

It makes little sense for parents with a large estate and a child who has disabilities but is physically healthy to leave substantial assets locked in a trust that prevents distributions, which could interfere with the child's ability to qualify for government benefits. Assume, for example, an estate of $2 million in assets that would earn 5 percent annually in income: this would result in $100,000 of interest income generated for the child each year without ever touching the principal. Contrast that amount with $7,476 in annual income for a child receiving SSI.