Planning for a Child or Grandchild with Special Needs

If you’re the parent or grandparent of a child with special needs, the planning you do could make a tremendous difference to help your child or grandchild. You’ll also be helping your other children with having resources and tools to best help their sibling. Generally a special needs trust will be used to provide this help.

Trust planning for a special needs child or grandchild

Almost always whenever a parent or grandparent leaves funds for a child with special needs, it should be done through trust planning. Usually this is called a “supplemental needs” or “special needs” trust. The most common type of trust is created by the parent/grandparent (called the “grantor”) for the child with special needs (the “lifetime beneficiary”) during his or her lifetime. The trust will direct that any amounts remaining in the trust that weren’t used for the lifetime beneficiary, will be distributed ultimately to the Grantor’s other descendants.

The trust also must name a successor trustee, who can manage the funds and make distributions after the Grantor becomes disabled or dies. That successor trustee could be a family member. However, because of the complexities of these trusts and because the trust could last for many, many years, often a professional trustee is a better choice as trustee.

The family could still have input for this trust, by having the trust name a “trust protector” to review the investments and distributions and who could hire and fire trustees. A family member also could be named as a “trust advisor” or even have a trust advisory committee, to provide input about the lifetime beneficiary’s needs.

This trust could be part of a separate trust created by the parent/grandparent during life. Alternatively, it could be part of that person’s will. In either case, the trust must be carefully worded to ensure that the funds can be used for the full benefit of the child with special needs. In particular, careful consideration should be given whether the trust can only supplement (and not supplant) government benefits, or whether the trustee could use the trust funds if determined best in the trustee’s sole discretion, even if doing so would reduce or eliminate government benefits. Generally it’s best to allow the trustee that discretion. Otherwise the beneficiary might need money for a very good reason or to have a better life, yet the Trustee’s hands are tied so much that the money sits in trust instead of helping as originally intended.

Funding a special needs trust

One way of funding a special needs or supplemental needs trust is through life insurance. That can leverage available resources especially in the case of an untimely death of a parent. One option for a married couple providing for a child, where they particularly want significant funds to be available in trust if neither parent is living, would be to consider “second to die” life insurance. Generally that costs less than regular life insurance, and the insurance benefit will be available exactly when it’s needed the most.

The alternatives to doing this trust planning often don’t turn out as well as the right trust planning. Some parents exclude the child with special needs and leave their entire estate to their other children with the promise (or sometimes just with the hope) that they will “take care” of their sibling. Sometimes it works. But what if your other children receive the money and then die or become disabled themselves, or have creditor problems or lawsuits? Then you can kiss their inheritance…and any help with the financial support of their sibling…good-bye.

And if no planning at all is done, then the inheritance will pass directly to the child with special needs. That child would then lose current government benefits such as SSI or Medicaid. Where a child has medical bills of thousands of dollars each month paid largely by Medicaid, receiving an inheritance directly means that money will have to be spent unless it is put into a “first party” special needs trust.