Providing for a special needs child

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Tips and to-dos from money guru Jean Chatzky

One quarter of U.S. households have a family member with special needs. If you count yourself among them, you've likely thought about the fact that caring for that person financially may last your lifetime. How do you plan for that?

Protect your child's ability to qualify for benefits:

If you leave money or assets to a special needs child directly through a will, when the child turns 18 that money may be counted against him or her when it comes to determining eligibility for government programs such as Medicaid and Social Security Income (SSI). Most states require a child have assets of less than $2,000 in his or her name, not including a home or car, to qualify for programs. Make sure relatives who might give or leave your child money know the rules.

Consider a special needs trust:

This is a vehicle the tax code allows you to create for your child, then fund with any assets you’d like to put away for that child's benefit—not just stocks and bonds, but real estate and other investments. Because the proceeds of the account are used for your child’s needs, rather than owned by your child, the assets probably won’t be counted for Medicaid or SSI purposes. You'll need an estate planning attorney to help set this up (there are up to three different kinds of special needs trusts to consider).

Add a letter of intent:

Though not a legal document, this can provide instructions for your wishes and expectations in using the trust to provide for your child. Consider it a roadmap that people who may take on the tasks in later years have to follow. Include information about the benefits your child qualifies for, professionals (lawyers, doctors) your family uses and trusts, and personal information about your child you'd like preserved.

Choose a trustee wisely:

In naming a trustee, look for someone with the skill and time to take on managing the trust and experience with finances—as well as a relationship with your child—in case you and your spouse aren't able to do the job. It's a good idea to name a professional successor trustee (a lawyer, accountant, or bank) in case your first choice is unable or unwilling to serve.

Or consider an ABLE account:

A newer alternative to special needs trusts, ABLE accounts (which also preserve the ability to qualify for public benefits) are like 529 accounts for people with disabilities. You can open an ABLE for people with disabilities age 26 or younger and contribute up to $15,000 a year (with a limit of $100,000 before impacting Supplemental Security Income (SSI))—the money can be invested and income on the accounts isn't taxed. The money in the account can be used for any expenses related to living a life with disabilities (healthcare, housing, education, etc.). Individuals with disabilities can own and—if possible—manage their accounts themselves. One difference between special needs trusts and ABLE accounts is that after the beneficiary dies, any money left in an ABLE must go to repay Medicaid before it can be distributed to other beneficiaries. Talk to an estate planning attorney about which option is better for you.

Write a will—and name a guardian:

As soon as you have children—any children—you should consider a will. It's typically the document that allows you to name a guardian for minor children. In choosing a guardian, pick a single individual (not a couple) based on his or her time constraints, sharing of your values, good health and relative age (this is a challenging task), geographic location (would a move by your child be necessary), and willingness to do it. Some states will also allow you to get a temporary guardian for minor children.

Apply for appropriate aid and educational programs:

Even if you have a comprehensive health insurance policy, the high medical costs often associated with having a special needs child may mean you're out of pocket thousands of dollars each year. Applying for Medicaid can help; it becomes the secondary insurer and can pick up many of those costs. Likewise, it's important to know that states require free and appropriate education for children with disabilities until age 18 (and most states continue those until age 21). Research appropriate programs for your children's needs and understand that you may have to fight (with the help of an attorney) to get your budget-strapped local school district to provide them.

Consider cash value life insurance:

More than 90% of special needs trusts are funded by life insurance settlements. Survivorship life (otherwise known as second-to-die life insurance) allows you and your spouse to buy coverage under one policy that doesn't pay out until the second death. It's typically cheaper than a policy written on a single life. Also, talk to grandparents and other relatives about designating your child's trust as beneficiary for their life insurance.

Keep your child's 18th birthday in mind:

In most states, the 18th birthday is the official entry into adulthood and the day your child becomes his or her own guardian, regardless of his or her ability to handle it. If needed, you may want to apply for guardianship (some states call it "conservatorship," and rules by state can differ) so that you will continue to have legal authority to make decisions (personal, medical, financial) for your child. It's best to put this in process a year or two before your child hits 18.

Don't neglect your own needs:

Having a special needs child can be a tremendous financial responsibility—but don't neglect your savings for emergencies, college for other children, and, of course, retirement. You can get expert help if you feel you need it from a member of the Academy of Special Needs Planners.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments.
Jean Chatzky is not employed by Fidelity but may receive compensation from Fidelity for her services.

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