How to plan for loved ones with special needs

The future is a major concern for many families caring for a loved one with a disability. The most common questions: What will happen to their loved one after they are gone? Who will provide day-to-day care? And how will the costs be covered?

These are important questions, as ensuring ongoing care is not as simple as setting aside money for a loved one living with a physical, mental, or developmental disability. If the individual is receiving government benefits like Medicaid or Supplemental Security Income (SSI), leaving assets to them directly in your will or estate plan could make them ineligible for those benefits. And that could impact their access to services like round-the-clock care, occupational therapy, or help with independent living.

“You can’t easily replicate what’s made possible by those benefits, no matter how much money there is (in the estate),” says Aurora L. Basa, a special needs trust senior advisory specialist with Wealth & Investment Management, Wells Fargo Bank, N.A., “The services can be wildly expensive, and it’s hard to find vendors that provide them.”

One potential solution: A special needs trust — sometimes called a supplemental needs trust — can help ensure your loved one gets the care and support they need while preserving government benefits. A special needs trust is designed for the benefit of an individual living with a disability. It is typically funded by a gift, an inheritance, life insurance, or compensation from a personal injury or other type of legal settlement.

What to know: In-kind support

Since SSI is meant for expenses such as food and shelter, people think a special needs trust can’t cover those kinds of expenses. It can, Basa says, but there are some important details to consider.

“Distributions from a special needs trust have to be for the supplemental needs of the beneficiary,” Basa says. Any cash provided directly to the beneficiary will reduce their SSI benefit that month by the same amount. To avoid that, special needs trusts will often pay a provider directly — say, paying a cellular provider for a beneficiary’s cell phone, rather than just giving money to the beneficiary so they can pay the bill.

However, when a special needs trust is used to provide food or shelter (including utility payments), it provides “in-kind support and maintenance.” That could mean using the trust to make rent payments directly to a landlord or giving the beneficiary a credit card for groceries and then paying the credit card bill from the trust. In these cases, beneficiaries do see a reduced SSI payment — but they may still end up better off than if they received cash directly from the special needs trust. When it comes to in-kind support, it may be helpful to consult an attorney specializing in special needs trusts.

What to consider in your estate plan

Some families want to leave all the money to a trusted family member and have that person take over care duties. But that can create problems, Basa warns. For example, if the family member with the assets goes through a divorce and loses half the assets to their former spouse, those funds are no longer available to care for the disabled loved one.

Basa says it can also be difficult to decide how to divide assets among children when one child has a disability, and the others do not. “Let’s say the family has three kids. A lot of parents would want to evenly split their assets among them,” Basa says. “But if you run the numbers, maybe the disabled child should receive half.” That may not appear fair at first glance, but a child with a disability likely will need more financial help, as they may not be able to work or earn as much as children without disabilities.

“This is why I talk to clients all the time about proper planning,” Basa says. With the help of a financial professional, she says, families can uncover the strategies that will work best for them — and that will help provide for a loved one’s care in the most effective way for years to come.