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There isn't a lot of information out there to help financial professionals deal with the special needs of clients with disabled family members. Financial planner Ron Pearson discovered that from personal experience.

Roughly 15 years ago, Pearson asked himself what would become of his two developmentally disabled sons when he and his wife weren't around anymore. At the time, he was winding down his navy career and studying for the CFP designation. He thought it'd be easy to find the information he wanted to help him meet the financial and lifestyle needs of his sons, but his coursework didn't have the answers.

Pearson eventually found the necessary material elsewhere, and then went to a lawyer who specialized in trusts and wills and asked him to draw up a special needs trust for his sons. The lawyer didn't know what that was. "I realized that if it was this hard for me to figure it out with my background, it must be more so for others," says Pearson, owner of Beach Financial Advisory Service, a fee-only firm in Virginia Beach, Va.

Today, one-third of Pearson's practice focuses on planning for families with disabled and seriously ill members, and he speaks nationally on the topic with other advisors and various groups. "I find that special needs is one of those areas that financial planners might run into once in their career," says Pearson. "It's one of those niche issues that's hard to plug into."

Special needs cases can be tricky both financially and emotionally, and plugging into the wrong outlet could spell trouble for the client. "When you have a special needs child, financial planning becomes a two-headed goal," says Neil McKeon, a vice president and financial advisor with Merrill Lynch in Princeton, N.J. "You must fully fund the retirement of the parents, while also funding the lifestyle of their child in a way that keeps them eligible for government benefits."

Other than the super wealthy, most families with special needs children rely on government-funded programs such as Medicaid and Supplemental Security Income (SSI) for assistance. Medicaid covers medical costs; SSI provides for food, clothing and shelter.

To qualify for these and other programs such as Section 8 housing, a special needs person can't have more than $2,000 in total assets, among other stringent requirements. Because these programs don't meet all of the financial needs of disabled people, many families create special needs trusts to handle noncovered expenses such as transportation, recreation, entertainment or whatever else is needed to maintain a desired lifestyle.

These trusts are established in one of two ways. One method involves a third-party funded vehicle set up by the parents or other family members of a special needs person. These can involve a family inheritance, an insurance policy or both. The other involves money received from a personal injury settlement. In either case, the funds must be put into a trust and administered by a trustee.

When properly constructed and administered, special needs trusts provide supplemental funds without forfeiting essential government benefits. But if the trustee unwittingly pays for services covered by the government, this reduces those benefits by an equal amount. Say, for instance, a special needs person gets $560 a month in SSI, and the trustee uses $600 to buy that person a new wardrobe. That would eliminate the SSI benefits, and without SSI the person isn't eligible for Medicaid. Once these are lost, families must go through the bureaucratic hassle of reapplying for benefits.

Another problem occurs when a special needs person receives money directly for any reason, including an inheritance, and even if it's used to purchase items not covered by government programs. It's considered income, and it could push the recipient over the eligibility threshold for needs-based government programs.

Advisors need to incorporate the nuances of a special needs trust into their financial planning. For example, it's common to name a child as a continent beneficiary on a parent's IRA, but doing so with a special needs child could potentially disqualify them from receiving government benefits.

Finding an attorney versed in special needs trusts is an important first step toward creating an effective trust. "I'd start by looking at state and local bar associations to find out who the specialists are in this area," says Ted Kurlowicz, an estate-planning attorney and a faculty member at The American College in Bryn Mawr, Pa., which hosted a one-day special needs conference in March. "This is really a specialty area."

Partnerships between advisors and attorneys can work well if both parties know their roles and are on the same page. Tim Fabio, a vice president and financial advisor with J.P. Morgan Investments in New York, works in tandem with attorneys when it comes to his half-dozen special needs clients. Typically, the attorney has the primary relationship with the client and then brings in Fabio and his partner, Rob Decker, a CFP certificant, as investment specialists.

In some cases, the special needs client got a large settlement after suffering a debilitating injury. "Some of these families aren't well off, so they view the money like they just won the lottery," says Fabio. "They don't realize they have a disabled individual needing expensive long-term care. They have a tendency to use the money to support the family rather than the intended beneficiary."

In a sense, a special needs trust is only as good as the trustee appointed to oversee it. But finding the proper trustee isn't as simple as it sounds. "It's not a financial issue as much as it is a competency issue," says Victoria Hoffman, an Atlanta attorney and certified financial planner. The chosen person must be able to understand Medicaid, navigate through the social security maze and have a flair for money issues. Obviously, that's no small order. And, says Hoffman, financial institutions generally don't bother with a special needs trust unless it has sizable assets.

In many cases, parents of a special needs child choose one of their other children as trustee under the assumption they're willing to take on the responsibility and are able to get up to speed on the various responsibilities the job entails. McKeon, the Merrill Lynch advisor, has one client who established a $2 million special needs trust for his child funded by an insurance policy. He named his daughter as trustee, but never told her.

McKeon says special needs cases should often entail a three-part approach involving the advisor and a knowledgeable attorney, along with a nonprofit social services group providing advice and potentially acting as trustee, or at least co-trustee. These groups perform trust administration, and are specialists in dealing with regulations in their respective states.

Regarding McKeon's client, he planned to go over the existing trust with that person and an attorney he knows with expertise in special needs trusts to make sure it's crafted properly. Next, he and the client were scheduled to meet with a social services group, Planned Lifetime Assistance Network of New Jersey, to discuss a possible co-trustee relationship.

Other Needs

Special needs clients require more than just financial guidance. "As planners, you need to understand the psychology of people with special needs children," says Joan Sharp, founder and principal at Life Strategies LLC., a fee-based firm in New Castle, Del. "It's a hard situation for them to deal with, and it causes a lot of divorce."

Sharp believes that special needs cases will become a growing area as these situations become more mainstream. As such, she looks for other avenues that add value for clients such as finding programs ranging from dance groups for special needs children to support groups for their parents.

On the financial side, Sharp stresses the importance of communication in families with special needs cases. Although discussions about inheritance issues often make for awkward conversation, it's a good idea for parents to approach that rich, childless uncle who's talked about leaving part of his money to their children. "It's important to say, 'if you're going to leave Johnny some money, please do it this way,'" says Sharp, alluding to a special needs trust as a means keep government benefits intact. "We need to be able to coach our clients on that."

Sometimes it's the little things that can make a big difference with special needs clients. Pearson at Beach Financial starts off the planning process by requiring parents to write a letter of intent for their children. These are nonlegal, nonbinding documents that detail all the little things about a child that makes that person who he or she is. These items can range from their fear of needles to their favorite color, and from their medical history to who their favorite relatives are. It should describe the type of living arrangement they want for their child, as well as any other pertinent information to help subsequent caregivers understand that individual and to provide the desired lifestyle for them. Essentially, it's the life story of that special needs person.

"The soft side is very important," says Pearson. "It tells me what the family wants for the child, and that gives me guidance so when I look at their financial situation I can help them get where they want to go."