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7 Financial Steps to Take if You Have a Special Needs Child

Having a child with special needs changes everything, including financial plans. While other children are expected to eventually become self-sufficient, a special needs child may need care for the rest of his or her life.

"The one thing that keeps us up at night is who is going to fill in for me," says Kelly Piacenti, head of SpecialCare for MassMutual and the mother of a special needs child. Without proper plans in place, it could be the state that steps in to manage care, and for many parents, that isn't necessarily reassuring.

Andy Schwartz, a certified financial planner and principal with Bleakley Financial Group in Fairfield, New Jersey, doesn't have a special needs child, but he is a father. "I would be very uncomfortable with the idea of leaving that child in the hands of the government," he says. His clients with special needs children often feel the same way.

However, that doesn't mean these parents don't get some help from government programs. Social Security, Medicare and Medicaid may all provide services that help lighten the load. The key for parents is to find a way to set aside money for their child's care without inadvertently making them ineligible for government assistance. Here are seven ways to prepare for the potential costs of a special needs child:

Step 1: Find the right expert. Before getting too far into the planning process, parents should seek out experts who have experience in the area. Piacenti says MassMutual has 600 planners who work with special needs families, and there is a Chartered Special Needs Consultant designation available through The American College of Financial Services. Families can also find attorneys who specialize in special needs planning. "They have an incredible vantage point because they work with so many families," says Christopher Krell, a certified financial planner and principal with financial firm Cassaday & Company in McLean, Virginia.

[Read: 8 Tax Tips for People With Disabilities (and Their Caregivers).]

Step 2: Select the right planning vehicle. In order to remain eligible for government benefits, special needs children need to be practically destitute, Krell says. For some programs, having as little as $2,000 in the bank is enough to disqualify a person. Fortunately, there are two ways to set money aside for a child's care without disqualifying him or her from government assistance.

-- Supplemental or special needs trust. Money from an estate, life insurance policy or other source can be deposited into a trust. The trust owns the assets, and a designated trustee controls how they are spent.

-- ABLE accounts. Named for the Achieving a Better Life Experience Act of 2014, ABLE accounts allow parents to set money aside for their child's future needs. While there is no tax deduction for contributions, money withdrawn from the account is tax-free so long as it is used for qualified expenses.

Trusts are the less restrictive option, but ABLE accounts are inexpensive and don't require a lawyer to set up. "The ABLE [accounts] are so great because they are so simple," Krell says.

Step 3: Carefully select a trustee. Parents setting up a trust need to be thoughtful about who they choose as the trustee. This person will control the assets, so they must be trustworthy above all else. Some parents may prefer to have the trustee be the same as the child's anticipated caregiver. That way it will be simple for the caregiver to access money as needed.

However, parents shouldn't assume one of their other children will want to step into that role. "We're hearing more and more that siblings don't want to take over and be involved," Piacenti says. Before naming anyone to be trustee, the family should have a meeting with all involved relatives to determine what roles people are willing and able to play.

[Read: What to Know About Special Needs Financial Planning.]

Step 4: Review your life insurance policy. Using life insurance benefits is a common way parents plan to pay for their child's ongoing care. But it's a mistake to have the child named as a beneficiary. Instead, the trust should receive the money to ensure there is no interruption in government benefits. In this situation, a whole life policy, rather than term life, may make the most sense because there is a guarantee of benefits regardless of how long a parent may live.

Step 5: Decide how to split your estate. One of the toughest challenges facing parents is how to equitably divide estate assets among children. "How do you protect your special needs child without leaving the other children wanting?" says Steven Friedman, a partner with the law office Stark & Stark in Princeton, New Jersey. There is no simple or easy answer, he says. Parents may assume an equal split is most fair, but doing so could leave a special needs child without cash later in life to pay for expenses. On the other hand, government programs may cover much of the cost of care for some special needs children, and there is no need to leave a large sum. A planning professional can help parents work through this issue.

Step 6: Write a letter of intent. Another challenge facing parents is that special needs children could outlive them by 20 or 30 years. "Trying to create something that will be relevant for so long is really tough," Friedman says. Writing a letter of intent won't fix that problem, but it does provide a way for parents to share what they hope for their child after they are gone. It's not legally binding and doesn't replace a trust, but a letter of intent can share information on how parents hope their assets will be used and who will care for their child.

[Read: Preparing for Retirement with a Disabled Child.]

Step 7: Implement your plan ASAP. Even after parents know how they'd like to proceed, Schwartz says it can be easy to put off taking action. "There should be much more emphasis on not just talking about it but getting it done," he says.

Having a trust set up and getting all family members on the same page provides peace of mind and security in case anything unexpected happens.

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