Lending a hand to kids with special needs

(Money Magazine) -- Parents of children with special health-care needs are all too familiar with how different their financial realities are from those of run-of-the-mill families.

While most of us raise our kids from cradle to high school graduation, pay for as much of college as we can and chip in occasionally from then on, parents of special-needs kids face extra burdens as their children grow up - and may have to provide support that goes on for life.

Editor-at-large Jean Chatzky appears regularly on NBC's Today. Contact her at money_life@moneymail.com.

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There is a good possibility that you know one of these children, perhaps in your extended family or among your close friends.

One in five American families with kids in the home has a child with special needs. That's a pretty broad class, encompassing 9.4 million children with conditions ranging from mild emotional problems to juvenile diabetes to Down syndrome.

A fifth of special-needs children have a condition that limits their daily activity, and nearly that many need specialized therapy. That often means parents have to curtail work hours to care for their kids, while at the same time coming up with extra money for today's health-care costs and preparing for an uncertain future (including finding the right guardian).

That's a big burden. Perhaps you've wondered if you could help by contributing a little now or setting aside funds in your estate.

But here's where you need more than your impulse to do good. Just as putting too much money in a child's name can mess with eligibility for college financial aid, putting even a little in the name of a child with special needs can muck up the works.

Parents come to understand this. Aunts, uncles, grandparents and well-meaning friends? Not so much.

The complicating factor is that anyone giving money to a child with disabilities has to be careful not to do anything that will disqualify the child from receiving means-tested federal and state government benefits. Minors generally can receive assistance only if their parents' income falls below the poverty level, but the day they turn 18, they become eligible to receive Supplemental Security Income (currently $603 a month at the federal level; some states provide additional amounts) and Medicaid, which will cover health care, prescriptions and supervisory nursing care in most states.

Keep that birthday in mind because it brings with it a host of complications. An SSI applicant can't have an earned income of more than $858 a month or have more than $2,000 in assets, excluding a car or home, when he signs up for benefits. (If a child starts working later, he can still receive reduced benefits.)

Enter the special-needs trust. To get their children what they need without forfeiting government help, many parents establish a trust to be tapped after their deaths. It can be used to provide for extras that Medicaid doesn't cover, including eyeglasses, various dental procedures, private therapy and other things a trustee thinks will benefit the child.

Parents are taught to fund the trust with whatever is left after paying for current expenses and to buy a life insurance policy (the trust, not the child, should be the beneficiary) to cover the rest. This is where you can come in. If you are inclined to give a monetary gift to the child or to leave him or her money in your will, know that gifts are to be made to the trust and not to the child.

"Even families who have done the best planning may have an aunt or grandparent leave $20,000 in a custodial account for the benefit of the child," says Steven Rhatigan, an estate planner in The Woodlands, Texas who works with families that have children with disabilities. "That could prevent them from collecting their benefits."

To figure out the scope of their child's need, Rhatigan takes parents through a three-step process (you can download a planning worksheet at stemark.com).

First, try to determine how much care will cost on an annual basis now and in the future.

Second, figure out how much money the child will likely get in benefits, including means-tested SSI and, once the parents retire, Social Security payments.

Third, compute the gap.

"We try to come up with a number so that each family knows how much they have to invest or how much insurance they have to buy to make sure their special-needs child is protected, whether or not the parents are alive," Rhatigan says. A child who will spend adulthood in a residential facility could require a trust of $500,000 or more to provide for creature comforts as well as to pay for care beyond what the government will cover.

What's your role? First, let the parents know that you are in a position to help and that you really want to. Then get some assistance yourself. Call a good financial planner. You may also need a knowledgeable estate-planning attorney.

"Both of these people need to have a specialty in special-needs and disability law in your state," explains financial adviser Cynthia Gavenda of MassMutual, who has an eight-year-old son with special needs.

This is one area of finance, she warns, in which having good intentions is simply not enough. You need good practices to go with them.