Disabled -- But Financially Secure

Supplemental care trusts provide for an offspring without forfeiting public aid

Chris Sullivan is in a unique position to provide financial planning services for parents of kids with special needs. He not only raises a child with a disability, he lives with a disability himself. Both Sullivan and one of his two daughters are deaf.

But his deafness has done nothing to disable his ambition. In 1989, after just a few years as a market analyst on Wall Street, Sullivan launched a program at Merrill Lynch (MER ) providing financial services to the deaf. Over the years, he has spotted an even greater need. "More and more children with all kinds of disabilities are outliving their parents, and it's imperative that a financial plan is in place to maintain their quality of life," says Sullivan, 57. In particular, he has seen a tremendous increase in the number of families making inquiries or setting up accounts for their autistic children.


In reaction to that broader need, Sullivan's division has morphed into Merrill Lynch's Special Needs Financial Services group, which has $1.5 billion in client assets. Merrill Lynch is the only major brokerage firm that has a separate unit specializing in this market. Some 700 of Merrill's 13,000 financial advisers have been trained to assist these families. Through a network Sullivan built, he connects families to a team that includes a financial adviser, an estate planning attorney, and a social service representative or disability advocate. "All three areas must be addressed together," says Sullivan, who communicates by lipreading.

The financial planning centers on protecting the child's ability to qualify for Medicaid and Supplement Security Income. "Regardless of socioeconomic level, a person with a disability should accept public aid," says Robert Gunderson, a special needs attorney in Minneapolis. These programs pay for most medical care, housing, and other community services. But under federal and state laws, disabled adults can't receive these benefits if their assets exceed $2,000.

That means parents have to set up a special needs trust (also called a supplemental care trust) so the child doesn't own the assets. The trust can accept and invest inheritances and gifts, and money from the trust can supplement the child's government benefits without jeopardizing them. When Tim Hood, a retired U.S. Navy rear admiral, and his wife, Janice, created a trust for their mentally disabled daughter, Jennifer, 35, they included two pages detailing the expenses the trust would cover. For example, it will pay the $30,000 a year for a group home in Jefferson, Wis., as well as for entertainment.

Managing the money in a special needs trust is especially tricky. The funds likely will be required for decades more than a retiree would need them. That means investing for growth while providing current income to the beneficiary.

You can fund the trust in several ways. Regular life insurance and second-to-die life insurance, which pays out after the second parent dies, are popular. Other options include Social Security survivor or military benefits; property, such as a family home; and money from retirement funds.

Whatever the source, "the trust should be funded upon the parent's death, and not before," says Mary Anne Ehlert, a financial planner with expertise in disabilities in Vernon Hills, Ill. That's partly because trusts pay taxes at a rate higher than if the money were held by the parents. Also, if the child's condition improves so the trust isn't needed, you don't want the assets locked up.

That's not likely in Jennifer Hood's case. Her parents will fund her trust with a $500,000 life insurance policy. They will also use the $40,000 annual survivor benefit that Hood set aside from his retirement plan -- to be paid to Jennifer for life after the second parent dies.

The amount left in the trust depends on your wealth, child's age, other children's expenses, and retirement needs. "We have a life to live, too, and we wanted to be fair to our son," who is 32 and in the Navy, says Tim Hood. Whatever the amount, you must decide on a living standard for your child. That, in part, depends on where your child will live. State laws governing special needs trusts and public assistance are not all alike. Ehlert recommends that parents write a "letter of intent" that clearly defines the type of lifestyle and medical care they want for their child. It should also name guardians and trustees.

The choice of trustees is a thorny issue. "Parents typically want a sibling," says Thomas Begley Jr., executive director of the Special Needs Alliance, a network of disability lawyers. But usually "they don't have trustee or money management experience." More awkward is the conflict of interest that may ensue if a relative is set to inherit any trust money the beneficiary does not use up. Begley suggests a three-person committee comprising a professional trustee, a social worker, and a family member.

Finally, it's critical to hire an estate lawyer with special needs experience. "We had three sets of trusts done before we got it right," says Hood. A minor error can be expensive -- and harm your child's security.

By Toddi Gutner

    Before it's here, it's on the Bloomberg Terminal.