If your clients have special-needs children, it's time to revisit their planning assumptions. Will there be enough assets to provide for the special beneficiary? Is it time to juggle the planning to reflect the impact of the recent economic situation?

Unfortunately, a more basic issue is whether they have ever properly addressed the nuances of special-needs planning. Many clients haven't. Special-needs planning is complicated and subject to dangerous misunderstandings.

COMMON MISCONCEPTIONS

There are three planning misconceptions that can send the parents of special- needs children down the wrong road:

Misconception 1: "I should disinherit the special-needs child because she receives public benefits." The misconception is that the government will provide for the child. It will, but only for food and shelter at the poverty level. There is also no assurance these benefits will continue. Proper planning, using a special-needs trust (SNT), is vital.

Misconception 2: "I'll leave assets to my other children. They will take good care of their special-needs sibling." What if the other children die first? Assets bequeathed to siblings are subject to divorce and creditor risks. What if a sibling opts for a new Maserati instead of helping his special-needs brother? Safer planning should be pursued.

Misconception 3: We can afford to leave more than enough money to care for our special-needs child." Living costs and the expense of medical care for a special-needs child or a seriously injured heir can erode even the most substantial estate or settlement. If Medicaid or other government benefits can cover some portion of these costs, then the funds might last for the child's lifetime as a supplement to these government programs.

THE TRUST OPTION

This last misconception is dangerous. A special-needs child must be Medicaid eligible to enter many programs. Medicaid is "means tested." If the child has too much income or too many assets, he or she won't qualify. So, the gift and estate plan should put assets in a trust designed to meet the needs of the child that government programs won't cover.

"Special-needs trusts are drafted and administered, so that trust assets won't count as resources for Medicaid," explains Regina M. Spielberg, an attorney with Schenck, Price, Smith & King, in Morristown, N.J. The special- needs child can't have more than $2,000 of countable resources to qualify for Medicaid benefits. This limit does not include certain excluded assets, such as a home or prepaid funeral benefits.

There are two kinds of special-needs trusts. First-party or self-settled SNTs are funded with property the beneficiary already owns or to which he or she is legally entitled. A common example is when a client's child is injured in a car crash and receives a large personal injury settlement. When the special-needs child dies, Medicaid must be reimbursed.

Third-party SNTs are funded with someone else's assets, and it is not necessary to reimburse Medicaid. But standard forms may list Medicaid as a beneficiary, thus undermining the estate plan by eliminating the remainder beneficiaries.

PLANNING TIPS

There are many practical suggestions planners can help clients to address:

* Know the inheritance plan. If the special-needs child receives an inheritance, it could ruin his or her ability to qualify for government benefits.

* Beware of gifts. A non-qualifying bequest can wreak havoc with the plan and destroy the means-tested benefits.

* Review all client assets and beneficiary designations to determine how they affect the special-needs child.

* Be sure any trust only provides supplemental care. Boilerplate language found in many standard trust documents can ruin the entire plan.

* Advise clients to obtain a life-care plan for the special-needs beneficiary. This is a great starting point for determining how much money a special-needs child will need for care. It should also discuss how to invest SNT funds and how and when to distribute them.

THE ROLE OF LIFE INSURANCE

Life insurance can be a great tool in special-needs estate planning. For example, a young couple with little money can buy a survivorship policy and name the SNT as beneficiary. Insurance can also be used to fund an inheritance for other heirs, leaving estate assets to fund the SNT.

Be wary of the ubiquitous Crummey powers included in most insurance trusts to qualify gifts for the $13,000 annual gift exclusion. If the special-needs child is a beneficiary, it could disqualify him or her from Medicaid. Instead, help clients evaluate a life insurance policy to fund an SNT for their special-needs child, with the remainder to be paid to charity after the death of the beneficiary.