) -- The financial challenges presented by family members with a disability or special needs can be daunting.

Over the past decade, the number of U.S. students enrolled in special education programs has risen 30%, according to the National Education Association. Approximately 21 million families in the U.S. are caring for a member with special needs, and one in every 26 families is raising a child with a disability, according to U.S. Census statistics.

The financial challenges presented by family members with a disability or special needs can be daunting, and the need for answers is growing.

Scott McDonald, a California-based certified special needs adviser for

Merrill Lynch Wealth Management

, has focused on disability and special needs issues for the better part of 25 years.

The Merrill Lynch Special Needs Financial Services Program, which was established in 1999 to serve the needs of this community, is billed as the only program of its kind.

"It's a very specialized field, but it is also an opportunity for us to make a difference for people who really need it," he says.

McDonald sees the number of families dealing with disabilities and special needs continuing to surge.

"Autism rates continue to rise," he says. "Elderly people are living lot longer and the incidences of dementia and Alzheimer's disease are on the rise because they are living longer. There are also issues where the disabled might have had a 10-year life expectancy 50 years ago and now have 30- or 40-year life expectancies. A child who is a 6-year-old with cerebral palsy who is in a wheelchair and can't feed himself properly is still is going to live 35 to 50 years, and his 38-year-old parents are not going to be in the mix in the future. Therapies are letting people live longer and better, but that means the greater need for proper budgeting."

There are also economic forces at work that place additional stress on caregivers and make such planning even more crucial -- a historic intergenerational wealth transfer, unemployment among parents who care for a child and the rising cost of care among them. There are also issues with government benefits, cuts in services and restrictions on services.

"Even the wealthiest families may not understand that the best programs are often government programs that you can't buy for any amount of money," McDonald says, referring to such things as autism therapies. "So on one hand we are restricting them and on the other hand we have no replacement."

"We have to be extra careful

with the disabled because they are not able to work or able to get the assets back if they are lost," he adds. "They also often have state restrictions on what's legal for them to invest."

McDonald says it is important to seek out specialists -- accountants, lawyers and financial planners -- who understand the complexities of special needs issues.

Shomari Hearn, a certified financial planner with

Palisades Hudson Financial Group's

Fort Lauderdale office, says requirements and thresholds for government benefits need to be considered carefully when developing a financial plan for a person with special needs.

A lack of planning can jeopardize a special needs child's eligibility to get means-tested government aid when he or she turns 18 and is considered an adult. With planning, the disabled adult can remain eligible for Supplemental Security Income and Medicaid even though other financial resources are available, he says.

Although the Social Security Administration excludes family income and resources when determining SSI eligibility, recipients themselves must earn little or no income and have less than $2,000 of available assets.

This is also important because in 39 states and the District of Columbia, SSI recipients are automatically eligible for Medicaid.

"It's crucial for the disabled to qualify for SSI because one dollar of SSI benefits in these jurisdictions ensures 100% of Medicaid benefits," Hearn says.

Even in the states without automatic eligibility, getting SSI strengthens one's case for Medicaid.

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"Even if the family of the disabled person currently has the financial means to support a person, their needs can be significant and the child may exhaust

those assets and also have difficulty later on becoming eligible for benefits," Hearn says.

Because merely giving money or assets to a disabled family member will likely make him or her ineligible for government assistance, some turn to disinheritance to protect eligibility. Leaving a disabled individual without those resources -- destitute, basically -- has obvious disadvantages, however.

"A disinheritance will ensure that they qualify for the government benefits," Hearn says. "However, let's say that later on there happens to be a situation where maybe a relative or a grandparent unknowingly leaves retirement money -- naming the child as an IRA beneficiary for example or bequeathing something to them in a will -- in excess of $2,000. That can cause the child to be disqualified or ineligible for supplemental Social Security and potentially Medicaid. If the parents decide to disinherit the child for the purposes of protecting those government benefits, the child in later years can no longer have any support from the family directly."

Leaving assets to a sibling and asking that the money be used for the handicapped brother or sister isn't wise either.

"There's no guarantee that the sibling would honor this request, and the assets could vanish if the sibling runs up big debts or is hit with an expensive divorce settlement," Hearn says.

McDonald sees great value in the creation of Special Needs Trusts in the 1990s. The trusts can hold assets -- including money won in a lawsuit resulting from the accident or incident that disabled a person -- that cannot be taken by the government as personal wealth.

"It's not fair to have a person who gets wronged by a medical malpractice or personal injury situation win a lawsuit but have it pay their public benefit and Social Security disability income," he says. "These trusts were created by the government to preserve those funds."

Such a situation is certainly not the only reason to have a trust. Hearn says establishing a third-party trust is, in fact, a better strategy in most cases.

"It's the most effective vehicle for transferring wealth to a disabled child or grandchild without jeopardizing his eligibility for government assistance," he says.

The trust must be created and funded by a third party, such as a parent or grandparent. The disabled person should not create the trust or fund it with his or her own assets nor have any control over it.

An independent trustee must administer the trust. The trustee should have authority to make discretionary non-support distributions of trust income and principal for the benefit of the disabled person. To avoid jeopardizing government benefits, trust payments must go directly to service providers, not the disabled person.

The trust should have "spendthrift provisions," which protect trust income and assets from the claims of the disabled beneficiary's creditors. The trust can be revocable or irrevocable. It can be established during the grantor's lifetime or through the grantor's will or other trust documents upon death. Ideally, it should be set up before the beneficiary turns 18, but it works at any age, he says.

The trust should be listed as the beneficiary for IRAs, 401(k) accounts, annuities and life insurance policies, instead of the disabled person. Let grandparents, other relatives and friends know they should not make an outright gift or leave an inheritance to the special needs person directly.

If the special needs person already has significant assets in his or her name, the best option may be to to transfer assets into a first-party special needs trust, Hearn says.

"The man difference between the first-party and third-party trusts is that

with the former when the disabled person passes away, whatever they received in Medicaid benefits has to be repaid before any remaining assets are then distributed out to other family members and other beneficiaries of the trust," Hearn says.

Last month, Merrill Lynch Wealth Management introduced an online

Special Needs Calculator

intended to help parents and caregivers navigate the often complex financial matters involved with the lifelong care of a family member or individual with special needs.

The tool analyzes an individual's needs based on financial information and projected life expectancy.

Among the variables it looks at are the projected income of a person with special needs, monthly expenses, such as housing, transportation, special education and health care costs, and federal and state government benefits. The calculator also factors in parents' years until retirement and has the flexibility to modify assumptions about return on investments and inflation rates.

The calculator can be accessed online, via an iPad and other tablets and smartphones. Parents and caregivers can also download a Special Needs Planning Workbook at the site. The intent is to help families identify potential shortfalls in their ability to sustain the quality of life of an person with special needs long after parents or caregivers retire, die or are themselves disabled.


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