Two years ago, my sister Cheryl, who is in her 40s, discovered she was pregnant. Her only child was 26, and she had been told she could not have more children. So the pregnancy was a shock, but a welcome one. Our family was on a new journey.
Shortly after learning she was pregnant, Cheryl was told the baby had a heart condition, and likely Down syndrome. The diagnosis was confirmed a few weeks later. Then Cheryl developed pre-eclampsia, and Airleigh was born two months premature, weighing 5 pounds, 5 ounces and sporting a full head of spiky, black hair. She spent two months in the neonatal intensive care unit.
We constantly worried about Airleigh’s health, even after she had a successful open-heart surgery at the tender age of 8 months. As an attorney whose professional life involves guiding families through the legal and financial challenges of raising a child with special needs, I also worried for my sister’s family’s financial future.
There are so many unexpected expenses for a child with special needs. Many of the healthcare expenses are covered by Arizona Long Term Care insurance (a Medicaid program) if the child is eligible, but it doesn’t cover everything. I wanted to help my sister focus on her daughter without fear for their future.
I spoke to Cheryl, her husband and our family about drafting a special-needs trust. The idea was that family and friends would contribute monetary gifts on Airleigh’s birthday and Christmas, and we could direct any inheritance gifts there, too. We could build savings over time to protect her future.
When properly drafted, a special-needs trust is a way to give money to someone on government benefits without affecting their eligibility for those benefits. That means when Airleigh turns 18, and her financial assets are reviewed to determine her eligibility for need-based Medicaid or Social Security programs, the government can’t consider any money held for her in the special-needs trust. Without such a trust, adults applying for benefits cannot hold more than $2,000 in money or assets without losing their eligibility.
Everyone in our family was excited about the opportunity to do something that would make a meaningful difference for Airleigh. We have set up what’s called a “third-party special-needs trust” because all the money comes from our family — a third party. A first-party special-needs trust is needed when the beneficiary is receiving funds directly. For example, someone may have received compensation for debilitating injuries suffered in a car accident.
This distinction is important: If something were to happen to Airleigh, the government cannot claim the money from a third-party trust. It would have a claim on funds from a first-party trust.
Airleigh still gets gifts to open on her birthday and at Christmas, but we also put cash gifts in her trust. Each member of our family contributes what they can. Our goal is for the trust to grow while she is young and has adequate healthcare coverage. When she is an adult, these funds can be used for her postsecondary education, dental care, to go on a trip or to cover many other expenses not covered by government programs.
Some caveats:
- Creating a special-needs trust by downloading forms off the internet can be dangerous. If done incorrectly, it can result in a person being denied benefits to which they are otherwise entitled.
- Once there is money in a special-needs trust, the amount must be reported to agencies, such as Medicaid, that provide benefits to the recipient. An annual review is required to to ensure funds withdrawn are being used properly.
- A special-needs trust does not have to be expensive and is usually done as part of an estate plan. It can be an amazing gift toward providing a future for a child with special needs while also providing a measure of financial relief for parents so they can focus on their child.
For those of you whose take-away is that I gave my beloved niece the most boring baby gift ever, I feel a need to defend myself. I also have bought adorable unicorn swimsuits, a super-cool stroller/car seat, a Fire tablet and other fun stuff. But the special-needs trust ensures that Airleigh will continue to have what she needs — and more — in the future.
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