One in 150 8-year-old children in the United States has been diagnosed with autism, according to the U.S. Center for Disease Control. Furthermore, the National Down Syndrome Society reports that one child in every 733 is born with Down Syndrome.

These kids are among the 2.3 million children, and among the total 17 million people in the U.S., with a mental or debilitating physical disability, according to the U.S. Census Bureau. That means millions of families–perhaps some of whom are your clients–face unique circumstances requiring special financial planning.

The biggest challenge from a planning perspective is that many children who have mental or severe physical disabilities require special care throughout their lives, long after parents and guardians have either passed away or are unable to provide the care themselves. But many families simply do not know where to turn for help.

As a financial professional, you are well positioned to help these families by educating them about their financial options and how they can help ensure their special needs children receive the care they deserve for the rest of their lives. It is a noble calling, one that you can prepare for with education and effort.

Securing government benefits

To start, one of the biggest concerns that parents and others who care for children and others with special needs may have is ensuring that the individual is eligible and remains eligible for government benefits, such as Social Security and Medicaid. These benefits often form the core of support for individuals with special needs, providing basic necessities such as food and shelter, medical care and other necessities.

The special needs child or individual who enjoys those benefits should not receive direct gifts or bequests. Such gifts, often made by well-meaning parents, grandparents and others, can disqualify the recipient from government benefits that have asset limits for eligibility.

The government programs that typically provide support for people with special needs are Social Security’s Supplemental Security Income (SSI) and Medicaid Title XIX for both outpatient and inpatient health care. To qualify for these programs, a disabled person typically must have no more than $2,000 in assets, and have little or no income. Asset and income levels vary for state sponsored programs.

Needless to say, the receipt of a significant gift can actually leave the child worse off financially than he or she was before receiving the gift. A common occurrence is a parent naming the child as beneficiary of a retirement plan, annuity or life insurance policy. Clients should refrain from doing so as that can have the same effect as passing on personal assets through a will.

Some families have tried to work around this problem by directing an inheritance for a special needs child to another family member or sibling. The idea is that the other family member will administer the assets for the benefit of the special needs child. However, this approach often has problems of its own. For instance, what happens if the family member charged with managing assets for a special needs child predeceases the child? Moreover, any bankruptcy filing or litigation could subject those assets to creditor’s claims.

The special needs trust

One of the most effective and popular solutions to special needs planning issues is the establishment of a special needs trust. Special needs trusts are separate legal entities that hold and distribute assets for beneficiaries who have special needs in a manner that protects the disabled child’s eligibility for government-provided food, clothing and shelter benefits. The special needs trust should not duplicate these benefits or be drafted as the primary source of support for the disabled. Rather, it should provide for supplemental assistance for needs not already covered by government programs.

Some special needs trusts are considered “self-settled” trusts (also called “D-4A trusts”). Most self-settled trusts hold the assets of a special needs individual and are used to pay for supplemental needs not provided by the government. A properly structured and administered D-4A special needs trust will generally not disqualify an individual for government sponsored benefits. Still, many states have the right to be reimbursed for benefits paid from any remaining assets in the trust at the death of the special needs individual (“payback provision”).

A special needs trust can also be established by a third party with assets of the third party (as opposed to assets of the special needs individual). A properly drafted third-party special needs trust can give the trustee discretion to distribute (or not distribute) trust assets for the supplemental needs of the special needs individual and will generally not disqualify the individual for government benefits. In addition, a third-party special needs trust does not need to include a payback provision. This means that any remaining trust assets may be passed on to other heirs.

Funding the trust

A special needs trust should be funded in the most effective and tax-efficient way for the beneficiary, taking into consideration the tax treatment and any limitations of lifetime gifting and at-death bequests to the trust, as well as the taxation of the assets held in the trust. In addition, care should be given in considering how much funding a special needs trust will have, given among other things, the age of the special needs child or individual, and the desire to provide for any other children.

If the clients (e.g., parents) plan to fund the trust during their lifetime and they know that at least a portion of the trust’s assets will not be used until their death, it may make sense to purchase life insurance on the life of one or both parents. A life insurance policy owned by the trust provides several advantages:

? The life insurance death benefit is received by the trust free of income taxes and excluded from the value of the insured’s estate for federal estate tax purposes, provided the trust is properly structured.

? The death benefit could provide the trust with significantly greater value than the cost incurred to pay premiums on the policy.

? Any potential growth in the policy’s cash value will be on a tax-deferred basis.

It is important to know that life insurance policies contain fees and expenses, including the cost of insurance, administrative fees and premium loads, surrender charges, and other charges or fees that may be incurred under the policy. Although special needs trusts can be an effective planning tool, your clients should consult with legal advisors to determine whether a special needs trust is appropriate. An attorney can help ensure that a special needs trust accomplishes the desired objectives within the context of applicable federal and individual state law.

Special needs planning takes special knowledge and skills, so there is no doubt that families of special needs children need your help. With proper preparation and guidance, you can help ensure that a family’s best intentions are transformed into the best plan, helping provide financial security and comfort for their special needs children for as long as they live. You will find that few things are as rewarding as helping those who cannot help themselves.

David Froscheiser, JD, is an estate and business planning consultant for Hartford Financial Services Group, Inc., Hartford, Conn. He can be contacted at .