Financial Care for Special Needs Children
Overview
Parents of a special needs child may have never-ending concerns about their child’s care. For instance, where will the child live should something happen to the parents? Who will care for the child, and from where will the money come?
How Much Do You Know About Financial Planning for a Special Needs Child?
Test your knowledge with this short quiz:
True or False. The plan that is often most helpful for families needing to make provisions for a child with special needs is a grantor retained annuity trust (GRAT). This device allows a trustee, typically a family member familiar with the child’s needs, to use funds placed in a trust by the child’s parents for the necessary care.
True or False. A charitable remainder trust (CRT) can be a favorable planning mechanism for the parents of a special needs child.
True or False. If a charitable remainder trust (CRT) is used and a minor child is the income beneficiary, any income tax deduction could be drastically reduced because of life expectancy differences.
Financial Planning for a Special Needs Child
Fortunately, help is available. Local, state, and federal programs can assist in easing some of the financial burdens on families. In addition, private groups can help with long-term care (LTC). However, if you wish to provide the highest level of care, you will need to plan for the best possible use of your funds.
Meeting Needs
The most helpful plan for families needing to make provisions for a child with special needs is a special needs trust. This trust allows a trustee, typically a family member familiar with the child’s needs, to use funds placed in the trust by the child’s parents for necessary care. It offers flexibility to handle almost any situation while providing privacy for the details of the arrangements made by parents, grandparents, or others who wish to make a gift to a special needs child.
Many assume that trusts are only for the wealthy, but a special needs trust is crucial in preventing the loss of agency funding after the parents are gone. For example, if a child inherits assets outright, they might become disqualified from receiving government benefits such as housing and medical care. However, assets placed in a trust and directed toward specific uses beyond those provided by government programs remain available for the customized care a parent may want to provide.
While a special needs trust can ensure financial care, some families also use a charitable remainder trust (CRT) as an additional tool. A CRT benefits both a charity and an individual. Here’s how it works:
A couple transfers liquid, highly appreciated assets, such as mutual funds or publicly traded stocks, into their CRT.
They receive annual income from the trust for a term of years or their joint life expectancies.
The IRS allows them to take a current income tax deduction for the present value of the property that will eventually pass to the charity.
The charity (often one involved in special needs care) receives the assets when the trust terminates.
Key Benefits of a CRT for a Special Needs Child:
✔️ Provides an income stream for the child, with either the child or parents as named beneficiaries.
✔️ If the child is the income beneficiary, the parents (as financial guardians) oversee the use of the income.
✔️ If the child outlives the parents, a named guardian steps in to manage the income.
✔️ The property placed in the trust is removed from the parents’ estate, reducing estate tax burdens.
✔️ No capital gains tax is due on the transfer of highly appreciated assets to the trust.
A Final Word
Planning for a special needs child can be both emotionally and financially challenging. However, with a solid plan in place, you can help ensure the best possible care for your child, both now and in the future.
Quiz Answers:
False
True
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