Creating a "special-needs trust" for children with disabilities

From the Pittsburgh Post-Gazette:

After eagerly anticipating the birth of their first child seven years ago, Shawn and Sharon Widenhofer found themselves embarking on a parental journey they had not planned for when they learned their daughter, Sarah, had been born with Down syndrome. (The family is pictured.)

Initially devastated that their hopes and dreams for her might not come true in the way they had imagined, they quickly armed themselves with information to become great parents and effective advocates for their little girl.

"From the beginning, we realized we'd have to think about the future in more specific terms as far as what would happen to Sarah if something happened to us," said Mrs. Widenhofer, 42, of Cranberry.

There are nearly 5 million children in America with physical, emotional or mental impairments, according to the U.S. Census Bureau's 2006 Americans with Disabilities report.

Families with disabled children must have a plan for who would care for their special needs if the parents were unable to -- and also how to provide for them in a way which would not disqualify the child from receiving government benefits such as Social Security and Medicaid.

The Widenhofers have created a special-needs trust for Sarah, 7, which is funded by whole life insurance policies on Shawn, 38, and Sharon. Money from the policies, however, would be owned by the trust to avoid affecting Sarah's eligibility for government assistance.

Anyone receiving Social Security disability benefits cannot have more than $2,000 in his own name without losing the benefits.

"If a family member leaves $10,000 to a child, it would disqualify them for social programs, but it could go into the trust," said Mark Stallsmith, a special care planner for Massachusetts Mutual Life Insurance Co. in Valencia, Butler County.

"Not only do families need to create the trust, they need to communicate that to other families members," he said. "They have to disinherit the [disabled] child and make the trust the beneficiary if they intend to do something for the child."

Creating the special-needs trust has taken a major emotional load off the Widenhofers, knowing that Sarah's needs will be taken care of if they pass away or become disabled.

"No one likes to plan for their demise," Mrs. Widenhofer said. "That was the hardest part of this. We were making plans for not being here and deciding who to put trust in, making sure they would have Sarah's best interests at heart and act as we would want them to."

Their work is not done. They have not completed another important document to be included in the trust known as a "letter of intent." It explains in detail how to care for a particular child, including information on her personal likes and dislikes, habits, medications, diet, churches and what makes her tick.

Very often children and adults with Down syndrome, cerebral palsy, brain damage and autism are not able to communicate their preferences to a new caregiver.

For someone as young as Sarah, those details are always changing. While the person the couple has appointed to look after Sarah knows her personality well, the Widenhofers have not gotten around to recording the information on paper. They realize Sarah's needs at age 7 will be completely different when she is 20.

Helen Collins, a vice president and senior trust adviser at PNC Wealth Management, Downtown, said the special-needs trust was intended to supplement any government benefits the child is entitled to, not replace them.

The trust is there to pay for things to improve the quality of a disabled child's life that are not typically provided by the government, such as horseback riding, music lessons, concert tickets, aqua therapy, Disney World or special camps.

"While vehicles are expensive enough, when you add the cost of a lift, that increases the cost," she said. "A family might even need to have their home remodeled or rebuilt to accommodate a child with special needs.

"Most homes don't have doors wide enough to accommodate a wheelchair or a bathroom of sufficient size. These are some things trustees can help the family assess the need for and arrange for the payment of from the trust."

Too often families will leave their assets to another family member who has agreed to use the money to care for the disabled child. That could expose the money to influences such as creditors, tax liens, divorce, lawsuits, bankruptcy or even greed. If an able sibling were to die first, his or her survivors would receive the money, and that might not serve the needs of the disabled person.

But recent rule changes have made the proper drafting of these trusts more important than ever. Several challenges to improperly worded trusts have caused government benefits to be denied to trust beneficiaries.

Advisers say trustees should make payments directly to providers of goods and services. The child cannot control or have direct access to any portion of the trust.

Special-needs trusts can be created using money a child already has received from a lawsuit or inheritance, or it can be established inside a will, which will come into existence when a child's parents die. The most popular way of funding that type of trust is through whole life insurance.

A major issue for parents to consider is the life expectancy of their disabled child. With advances in medical care, many children who would have in earlier days died before their parents are now outliving them.

"We have a lot of 80-year-old ladies calling us with 60-year-old special-needs children," Mr. Stallsmith said. "Mom is going into a nursing home and is wondering what will happen to that child when Mom never got guardianship of the child."

Mr. Stallsmith said guardianship needs to be established when a special-needs child reaches the age of 18; otherwise the parent cannot get access to medical records and make other important decisions.

The Widenhofers, who also have a son, Seth, 4, said the challenge for them and others in their special needs parent support groups has been finding a financial adviser who really knows the fine details of such planning.

"I've been to several classes and seminars where I knew more than the speaker," said Mr. Widenhofer, a senior technical consultant for McKesson, a health information systems company. "There are finer points of the law a planner should know about.

"Getting our financial plan together has taken a lot of weight off our shoulders, but we are continually reviewing the plan we have in place as well as new legislation that is being passed. We are planning for the worst and hoping for the best."