Business and Financial Now's the Time to Establish a Trust for Child with Special Needs

Many parents wrestle with the question of how to provide financial security for a child who may require a lifetime of medical care, psychological support or assisted living. One of the most effective ways to offer long-term assistance is by creating a trust that can contribute to your child's financial well-being without depriving your other children of their legacy from your estate. A special needs trust, also called a supplemental needs trust, is a specialized legal document designed to help an individual with a disability, including children, aging parents or other family members.              

When creating a special needs trust, you become the grantor of benefits to the beneficiary of the trust - in this case, a special needs child. You can fund the trust with a gift or a bequest, and appoint a trustee to carry out the provisions of your request. Because of the legal complexities, you should consult with an attorney familiar with tax and estate planning issues.

In my financial advisory practice, I've been involved with clients who set up trusts for children with autism – a lifelong developmental disability – a young adult with a drug addiction and an older adult whose spouse suffered from Alzheimer's disease and required 24-hour care. While the details of each trust obviously vary from individual to individual, there are some common themes and issues to consider. 

First, if you're considering establishing a trust to provide for a child or grandchild with special needs, now is a good time to put those plans into motion. That's because as an individual, one can currently give up to $5.12 million to a child or leave a legacy of up to $5.12 million (or a combination up to the $5.12 million maximum) without a federal gift or estate tax liability.

However, those generous tax exemptions, approved by the U.S. Congress in 2010, expire at the end of December. Since it's almost impossible to predict what Congress might do after the November election, the current laws work to your benefit when making plans to provide for a special needs child.

Also, many children with special needs can qualify for government assistance, such as Medicaid or Supplemental Social Security Income (SSI). That income is meant to cover the basics of food and shelter. A special needs trust supplements that funding by providing for extra medical care, a computer, transportation, furniture, travel and other personal items.

In my experience, it's best for a trust to be managed by an outside professional, such as a banker or attorney with experience in handling these situations. That's because naming one of the child's siblings or older relatives as "trustee" can stir up a host of family-related issues. Many people lack the knowledge needed to handle a trust fund or prefer not to take responsibility for the money.

Another aspect to consider is the distribution of funds. For example, you might want to be sure money goes directly to your child's medical and healthcare providers, a process that can also be accomplished by making a gift on behalf of the third-party provider. That type of arrangement ensures that the people who care for your child will be paid for their services. It also has the additional benefit of helping to minimize income for your child, so he or she can continue to receive government payments.

Depending on the current status of your investment portfolio, a special needs trust can be funded with property of funds belonging to the disabled person. You or someone else in the family can also fund the trust, which can be created during your lifetime or included in your last will and testament.

You could also name the trust as the owner or beneficiary of your life insurance policy. You could also fund the trust's purchase of a new life insurance policy, which has the advantage of providing a steady and stable source of income, unlike stocks or bonds, whose values can fluctuate due to market conditions. 

So, if you have a child with special needs or expect to provide ongoing care for another family member, now is the time to review your financial plan and consider creating a trust that can provide lifetime security in your absence.

Andrew Menachem, CIMA®, is a Wealth Adviser at The Menachem Wealth Management Group at Morgan Stanley Smith Barney in Aventura and teaches a course at the University of Miami. Views expressed are those of the author, not necessarily Morgan Stanley Smith Barney LLC (MSSB), Member SIPC. Neither MSSB nor Financial Advisor Menachem provide tax/legal advice. This communication must not be used to avoid penalties imposed by tax laws. Individuals should consult their tax/legal advisor before implementing any strategies.