Special Treatment

When clients have special needs children, an advis

There are few things that sound more heartless than the idea of disinheriting a child who is confined to a wheelchair. Perhaps the only thing worse is the idea of singling out a disabled child for exclusion while leaving one's able children to merrily divide the dough among themselves.

Ron Pearson routinely tells his clients to do both.

He's not a mean guy, really--the Virginia Beach planner with the Texas drawl has the mellow demeanor of a man who can taste the salt of the ocean in the air coming through his office window, the storytelling ability of a man who spent more than 20 years as a Navy pilot, and a sense of humor as dry as the San Antonio desert where he was born. He does lots of volunteer work; he has no horns, no pagan altars scattered amid the account statements on his desk. Upon meeting him, your first reaction is to stay for a barbecue and a swim, not to scream and flee in the opposite direction. So whence comes such chilling advice to disinherit a handicapped child?

More than 30% of Ron Pearson's clients are parents of special needs children; Pearson himself has two sons with disabilities. His personal and professional experiences have taught him that for the average parents, the most important factor in providing for the long-term well-being of a disabled child is that child's eligibility for government benefits. And the only way an adult child is eligible for those benefits is if she has less than $2,000 in her own name. If she has more, or receives more at any point--through, say, an inheritance left to her by well-intentioned parents--she's off the list. Sure, benefits will restart after the child's funds dwindle to $2,000 or less, but the child will then face the future without the benefit of the funds her parents intended for her, and with no means to enhance her life beyond the bare essentials in the years to come. It is thus imperative that money intended for the disabled adult child never be directed into an account in the child's name, but instead set aside in some type of special needs trust.

Sound complicated? In fact, this name game is only a single piece of an intricate puzzle of government regulations, trust laws, and health considerations faced by thousands of parents of disabled children. It's just one of the obstacles that Pearson, 54, helps his clients overcome. "It's very difficult for parents to work their way through the maze of regulations and get things done. It's unfortunate, but that's the way the system is," he says. "Since I understand the system, I'm able to guide the parents through the process." Not many planners share his expertise; Pearson guesses that he is one of only 25 planners in the country with in-depth knowledge about planning for children with special needs. But as a planner and as a father who has negotiated this maze on behalf of his own two sons, Pearson believes he's well-equipped to help parents make the right decisions to ensure the happy, healthy futures of their children.

You Need a What?

Everyone wants to live forever, but there are few people who wish for immortality more fervently than the parents of children with disabilities. The parents of the average child can breathe ever more easily as little Johnny makes his way through college and lands his first solid job. The burden slides from their shoulders as he starts earning a substantial income and launches a career. But providing for a disabled child's future doesn't stop with a mortarboard and tassel at age 22, and the parents' estate planning becomes more than a game of tax avoidance. Their financial planning decisions must ensure the child has food on his plate, clothes on his back, access to health care, and appropriate supervision for the rest of his life.

About twelve years ago, Pearson realized he needed to find out how to arrange for the care of his two disabled sons in the event of his death. The information available was meager: He found only a single good book on the topic, Planning for the Future (American Publishing Co., rev. ed. 1995) by L. Mark Russell, and some info from the former Association of Retarded Citizens (now called simply the Arc). He sought expert advice.

"I called up my estate planning attorney, who does trusts and wills every day, and said, 'Tom, I need a special needs trust,'" he says. The attorney had never heard of one. "So I literally cut and pasted the words together, went into his office, and said, 'Here, make this be a trust.' I had to train my own attorney!" The special needs trusts allowed Pearson to set aside as much money as he desired for his sons without affecting their eligibility for Medicaid and Social Security benefits. While government benefits would cover the bare essentials, the funds from the trust would enhance the boys' lives in other ways--anything from bikes and CDs to vacations and special recreation programs.

At the time, the primary professional interests of U.S. Navy Captain Ron Pearson were the $120 million of U.S naval aircraft he was responsible for and the A-6 bomber he regularly flew--not financial planning. As his Navy retirement date edged closer, however, his negative experience with the attorney and a positive experience he'd had with a local planning firm converged into an idea: Why not become a financial planner for special needs children? "This was an area I had special knowledge in," he says. "I wanted to use it." He earned his CFP in 1991 and worked part-time in a local firm until he retired from the military in 1994. After that, he went full-time at the firm for two years, then struck out on his own, founding his one-man fee-only firm, Beach Financial Advisory Service in Virginia Beach, Virginia.

The need for his services was, and is, gargantuan. There are more than 84 million children with disabilities in the

Beach Financial Advisory Service
Ron Pearson, CFP

Beach Financial Advisory Services

6204 Ocean Front Avenue

Virginia Beach, Virginia 23451

747-428-6634

Year practice began: 1994

Number of planners in office: 1

Number of clients: 30 asset management clients; approximately 10 one-time appointments per year

Compensation method: Fee-only

Average fee for a comprehensive

financial plan: $3,000

Fee for managing assets: Asset management only: Sliding scale from 1% on first $300,000 to 0.3% of anything over $3 million. Asset management plus planning: Sliding scale from 1.6% on first $200,000 to 0.3% on anything over $3 million.

Minimum office consultation: $200 for a two-hour session

Client demographics: One-third are parents of children with special needs, about 10% are military families, and the rest are pre-retirees and retirees.

Education: BA in geology, Rice University; MA in management, Webster University (St. Louis); MA in international studies, Naval War College

Previous incarnations: U.S. Navy pilot for 26 years

Professional designations: CFP

Outside interests: Sailing, traveling

Quotable quote: "It's very difficult for parents of disabled children to work their way through the maze of regulations. Since I understand the system, I'm able to guide them through the process."

United States, according to a 1995 study by the U.S. Census Bureau; Pearson estimates that there are 25,000 parents of disabled children in the Norfolk, Virginia, metropolitan area alone. And while such parents have more reason than most to make careful financial plans, they're some of the least likely people to have done so. "Ninety-five percent of these parents have made no plans," says Pearson. "They're overwhelmed. At the group I spoke to last night [a support group for parents of disabled children from birth to age five], everyone was saying, 'Well, I know I need to do something, but I don't know who's going to be the caregiver, or what to do about this, or this, or this . . .' And so they do nothing."

The need for his budding practice was there, certainly. The problem for Pearson was that many parents couldn't afford his fees, even his $100 fee for a two-hour session. "I found that the pool of potential clients was very wide," he says, "but it was also very shallow, because the parents had no money to pay me."

To keep his practice above water, he broadened his scope to include other types of clients, such as members of the military and retirees. To keep his message out, he found other ways to spread the word--acting as guest speaker at support group meetings for parents of disabled children, writing articles, even teaching the legal officers at military bases how to write the appropriate trusts. "There are a lot of people of modest means in the military," he says, "and when they can get these trusts set up, it can make a big difference for them." He began volunteering as a trustee of the Virginia Beach Community Trust, which offers some of the perks of a special needs trust without the gilt-edged price tag. He also started giving presentations at financial planning conventions, and advising attorneys who were writing trusts for children with special needs. "I'm not there to provide legal advice, obviously, but to guide them about the types of things they need to say in these trusts and the types of things they can't say," he says. "I read a lot of these trusts, and the attorneys call me to get the pros and cons."

Word of his expertise has spread. Pearson got a call in January from an attorney in the Caribbean who wanted help writing a special needs trust for a 15-year-old boy who had suffered a spinal injury. Prospective clients have called from as far away as California. (He's careful in giving advice to out-of-staters because regulations can differ from state to state, but, as he says, "I just try to help people as best I can.") While Pearson is glad awareness of the topic is increasing, he is quick to quash any notion that his dedication to the cause is extraordinary. "I'm not to be fitted with any kind of halo," he says mildly.

One Step at a Time

Talking to parents about financial planning for their disabled children is no picnic. The concepts are hard. The terminology is new. Parents who have never seen a food stamp find themselves being advised to apply for government benefits on behalf of their child. Parents who have spent 20 years building a protective cocoon around their child find themselves forced to face the fact that they won't always be there to take care of things.

"When I start asking things like, 'What would you want to happen to the child if you weren't around?' they get kind of hang-dog, like, 'Hey, this guy wants to talk about me being dead. I don't want to do that,'" says Pearson. "By the end of our discussions, though, they're going, 'Oooh, gee, I need to do this, and this, I need to change that UGMA account, I need to tell Grandma not to send the money here . . .' It's an amazing transformation."

How does he effect that change? Eschewing the hour-long lecture or the inch-thick binder, Pearson breaks the process into a series of step-by-step questions.

One of the first steps for most parents is the decision of whether to apply for government assistance for the child. The average

Trust Me
Trusts are an indispensable part of financial planning for the parents of disabled children. Unless the parents have $1 million or more to spend solely on the child's well-being, says Pearson, they'll have to depend on government assistance in the form of Social Security and Medicaid.

A disabled adult child is only eligible for these programs if he has less than $2,000 in his name. While parents could "spend down" the money intended for the child's benefit in order to maintain the child's eligibility, they'd be better off putting that money in some form of special needs trust. The funds held in the trusts listed below won't interfere with a child's eligibility, and can enhance the child's life with important "non-essentials" such as a week at camp, a new bike, or a trip to Disney World.

Here are a few common trusts and variations.

Special Needs Trust

Pros: Sets money aside for the child's benefit; maintains SSI and Medicaid eligibility.

Cons: Setup generally costs $1,000 to $2,000 in legal fees. Also, the issue of picking the appropriate trustee can be tricky. Family members may not be qualified, and the steep fees for ongoing professional trusteeship can significantly cut into the money available for the child.

Community Trust

Pros: A pooled version of the special needs trust, it has the same advantages, plus it can be much less expensive, even free. The presence of multiple trustees providing the same service to other families virtually guarantees continuity of trusteeship. Such trustees may also have more experience with disability issues than other professional trustees.

Cons: Such trusts may have an upper limit of $50,000 to $100,000 for total contributions.

OBRA 93 Trust

(Also called Medicaid or payback trusts)

Pros: Money inadvertently left to the child in the child's name (from grandparents, for example) can be rolled into this type of trust so as not to interfere with the child's eligibility for SSI and Medicaid.

Cons: When the child dies, Medicaid must be paid back from the funds left in the trust for the amount spent on the child's benefits. Can also be expensive to set up.

Moral Trust

Pros: Same as special needs trust.

Cons: Can be expensive. More importantly, money belongs to and is fully controlled by the family member. If the trustee (say, the child's older sister) gets a divorce, half the money goes with her spouse and can no longer be used to benefit the disabled child. And can Sis really be trusted not to run off to Tahiti with the money 15 years from now?

cost of a year of care for one disabled child--including living expenses, supervision, and health care--is $30,000 to $50,000, according to Pearson. "If the parents want to pay that themselves, in order to generate $50,000 a year, they need a pile of money that's a million dollars tall. If I'm talking to upper-middle-income people about welfare programs and they say, "Oh, I don't deal with welfare," I say, 'Okay. Got a million dollars?' They say, 'Um, nooo.' And I say, 'Okay, then we need to be talking about these welfare programs.'"

Social Security (in the form of Supplemental Security Income, or SSI) doesn't pay much--the maximum monthly payment in 2000 was $512--but the real boon is Medicaid. "Medicaid is better than Blue Cross/Blue Shield, in some ways, because it pays for all kinds of non-medical services--supervision in a group home, job training, case management--as well as the medical stuff," says Pearson. (For more info, see the Health Care Financial Administration Web site at www.hcfa.gov or the Social Security Administration site at www.ssa.gov.)

If the child is to be put on government benefits, the next step is to explain to parents that any money given to the child in the child's name will kick him off those benefits until the money is spent down to less than $2,000. Does Aunt Mabel have an UGMA account for Junior in his name? She shouldn't. Does Grandma write Junior's birthday checks to him in his name? Tell her not to. Pearson also counsels parents to make sure that the disabled child is not an inheritor in any family member's will, nor is the child a beneficiary of any life insurance policies, 401(k)s, or IRAs.

The money for the child must be put into some type of trust, and Pearson broaches the subject of trusts with more step-by-step questions, working up to a description of the best-case scenario from a discussion of the worst: "Let's say older sister is an accountant, and is used to dealing with money. The typical thing would be to leave the money to the sister in a 'moral trust'--she is morally obligated to spend that money on her brother. Okay, what's the downside?

"The downside is she marries that dirtbag Navy guy that you never liked, or she moves away to Alaska and has three kids. Is she still the right person to be doing all this stuff for you? Secondarily, if she realizes that he's the dirtbag that you always thought he was, then what happens to the money for little Johnny here? It gets split up in their divorce, because it's not Johnny's money, it's Sister's money. Or say, after four or five years of the drudgery of taking care of him, Sister says, 'You know, Johnny really needs a BMW for me to take him back and forth to the doctors.'"

Point taken. All right then, what are the alternatives? Two of the most popular are the special needs trust, described earlier, and the community trust, which is essentially a pooled version of the special needs trust. Want to designate your own trustee and contribute as much as you want to the trust? Don't mind paying more than $1,500 for the privilege? Pearson asks them. Try the special needs trust. Is $1,500 too much to pay to set up a trust, and are you going to contribute $100,000 or less? Try a community trust; many cities have them. They're cheap, sometimes even free, and with multiple trustees in charge, the parents don't have to worry about a trustee dying or moving to Alaska.

"When you explain things this way," says Pearson, "they pretty much say, 'Yeah, okay'--and they're off to see the attorney to get the trust done." (For descriptions of specific types of trusts for special needs children, see sidebar at right).

Is This Trust Worthy?

Of course, getting the client to a trust-writing attorney isn't the end of the story; sometimes it's the beginning of a whole separate problem. One wealthy family who thought they'd covered all the bases hired Pearson to double-check the special needs trust their lawyer had set up. "They had this estate planning binder that was--I'm not kidding you--four or five inches thick. It looked like this huge law book," Pearson says drily. "I open this tome up, and I find the special needs trust. And lo and behold, there was a clause in it that was going to make it invalid."

The offending clause was the Crummey provision, which gives a beneficiary of a living trust a window of opportunity to withdraw a contribution made to the trust. Without the provision, the IRS doesn't consider a contribution to a living trust a completed gift and won't count it toward the contributor's annual exclusion. Thus, "the knee-jerk reaction of an attorney is to always include the Crummey language," says Pearson.

"But when you're trying to protect assets for the betterment of a disabled child, and keep that child eligible for government benefits, you have to have the assets set aside in such a way that the child does not have access to them, which is just the opposite of what the Crummey provision does." To solve this dilemma, he says, the Crummey option should be given to the remainder beneficiary (the person who will receive the trust funds after the child dies), rather than the disabled child.

"So I get a call from the attorney with a tone like, 'Who the hell are you and why are you criticizing my work?'" says Pearson with amusement. "And I said, 'Well, I'm the guy that's going to save you from a malpractice lawsuit, because there's a problem with this trust, and here's what it is.'"

To try to avoid problems like these, Pearson recommends that planners refer clients with special needs children to attorneys who are board-certified in elder law. "As a general rule, they're the most likely to be knowledgeable about special needs trust issues," he says. A list of such lawyers can be found at the National Association of Elder Law Attorneys Web site, at www.naela.com.

While planning for special needs children can be complicated and difficult, the abundance of potential problems provides all the more opportunity for a planner to make a difference. One of Pearson's favorite success stories is of an elderly couple who came to him to make long-term plans to provide for their adult son, who was mentally disabled. At the time, they were paying for private health insurance for him, getting no government help. They didn't know where the son would live after they passed away, and they were worried that their money would run out before the end of their son's lifetime.

By the time the dust settled, the son's health care was being fully covered by Medicaid. A special needs trust had been set up. Plans for the son to move into a group home after his parents' eventual deaths had been settled. Thanks to a job assistance program through Medicaid, the son had landed a part-time job watering plants in a garden center, which he adored. Social Security benefits, which had previously been denied him in 1982, began arriving every month in the mail. To top it off, Social Security paid back benefits for the 15 years the son had been improperly denied benefits--a total of nearly $20,000.

If that kind of result isn't worth the trouble, what is?

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