Though grandparents are among the millions who have taken a big hit to their portfolios in recent years, careful planning can ensure a healthy contribution to the education and financial future of their grandchildren.

The first step involves a talk between grandchildren and their adult children. According to 2008 research from The Hartford Financial Services Group, 65 percent of grandparents surveyed reported that they plan to contribute financially to their grandchildren’s college education, but that less than one third of all survey participants talked with their adult children about those plans.

Statistics show the amount of money that changes hands between grandparents and their grandchildren is substantial even before the kids head off to college. Hartford reports that more than 40 percent of grandparents spend more than $2,000 annually on their grandchildren before they reach 18 years old. And once it’s time for the kids to head off to school, over half of grandparents who plan to contribute will give more than $10,000, with a quarter of those planning to give more than $30,000.

A visit to a CERTIFIED FINANCIAL PLANNER™ professional can help grandparents and their adult children coordinate a gifting strategy that makes sense. In the meantime, there are several options to consider:

Talk: Adult children and their parents might find it difficult to talk about money issues in general, but discussing a positive goal like funding a child’s future can pave the way to make discussions later about the grandparents’ estate issues and end-of-life care a little easier to handle. But initially, these discussions will hopefully deliver a reality check. The Hartford survey points out that 60 percent of the grandparents surveyed believe that financial aid will be the most likely way their grandchildren will pay for college in an era where federal aid is declining and grants and scholarship cover only an estimated 15 percent of total college costs.

Start early: While many families don’t turn to relatives for help until there’s an immediate need, earlier planning almost always produces better results. Grandparents already know that saving for a child’s college education is easier if it starts at birth. The same is true for the next generation, so grandparents or adult children need to set a plan in place as early as possible for maximum benefit.

Coordinate college support with overall estate planning: Grandparents should look at their support for their adult children and grandchildren as an overall part of their estate strategy. A CFP® professional, in concert with estate and tax experts, can help grandparents and their adult children settle a series of estate issues at one time, saving time, money and worry later.

Consider the 529 plan option: A 529 college savings plan is an investment vehicle operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Service Code, which created these plans in 1996. If parents have set up a 529 plan for their child, grandparents can contribute to that plan or they can set up their own 529 plan account with their grandchild as the beneficiary.

Watch the fees: No matter what savings or investment options you choose, make sure you’re not overpaying fees. A stock mutual fund may charge in excess of 1 percent of assets; you can certainly find quality mutual funds that charge less. Two good resources: Morningstar.com can provide you a general review of most mutual funds you might be considering. The second is the Security and Exchange Commission’s online Mutual Fund Cost Calculator () which can help you determine how the fees and other costs associated with the fund will add up over time.

Offer some investing training wheels: Grandparents have a unique relationship with their grandchildren. They can teach without “lecturing” like their parents, and for that reason, they might consider setting up an investment account with a small balance that the kids can monitor and discuss under the supervision of the grandparent.

Make the grandkids beneficiaries: Naming your grandchild as the beneficiary of a retirement account or insurance policy can be a tax-smart way to provide financial support for college or possibly a first home.

October 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP, ALU, AEP, a local member of FPA.

Why is estate planning important when you have a child with special needs?

Preparing for the day when you won’t be around to care for your family is a challenge that all parents face. But as a parent of a child with special needs, your estate planning needs are especially complex. Your will, and other estate planning documents you prepare, must address your unique concerns. These concerns may include:

• Providing for adequate lifetime care or assistance
• Appointing someone to manage your adult child’s finances
• Maintaining your child’s eligibility for government benefits
• Avoiding family conflicts

An attorney and other financial professionals experienced in planning for children with special needs can help you draft a comprehensive estate plan to ensure that your child is well-provided for after your death. If you already have an estate plan in place, you should have all existing legal documents reviewed (and revised, if necessary) to make sure they address your family’s needs.

Wills

A will is the cornerstone of any estate plan. It ensures that your money and property is distributed according to your wishes upon your death, and allows you to select a guardian for your child. Without a will, probate assets will pass according to the laws of intestacy, which generally assign a portion of the assets to the surviving spouse and a portion to the children. If your disabled child requires more financial resources than other beneficiaries, it’s especially important to prepare a will that reflects your wishes.

Trusts

A trust is a legal entity that enables you to leave assets to your disabled child (and others) outside of your will. You can create a trust during your lifetime (a living trust) or in your will (a testamentary trust). As the creator of a trust, you can decide what assets will be transferred to the trust, who the beneficiaries will be, what the terms and conditions of the trust will be, and who will manage the trust. Trusts are typically used to:

• Avoid probate
• Manage assets
• Provide for minor children
• Avoid estate taxes
• Protect assets from creditors

One type of trust, called a special needs trust, can play an important role in your estate plan. Specifically designed for the benefit of disabled individuals, a special needs trust can allow you to provide for your child without jeopardizing his or her eligibility for government benefits, an advantage not offered by traditional trusts.

Why use a special needs trust?

Government benefits, such as Medicaid and Supplemental Security Income (SSI) can be vital sources of support for your disabled child, especially if he or she is unable to buy, or afford, private health insurance. But because these government programs are needs based, your child will become ineligible for benefits if his or her countable assets (e.g., cash and other liquid assets) exceed $2,000, the limit that applies in most states. An inheritance, a gift from a relative, or a personal injury award may push your child’s assets over the limit, resulting in the loss of government support.

Unfortunately, government benefits generally provide only basic support. The portion of assets your child is allowed to keep and the small allowance for personal care he or she receives under government benefit eligibility rules may not be enough to pay for necessary items and services, such as eyeglasses and dental care. It is almost certainly not enough to allow the child any “luxuries” such as vacations or gifts for others.

If you want to provide funds that can be used for expenses not covered by government benefits while preserving your child’s eligibility for those benefits, consider establishing a special needs trust. Because assets deposited into, and income generated by, a properly drafted special needs trust will not be considered “available” to your child, they won’t jeopardize his or her eligibility for Medicaid and SSI.

In addition, establishing a special needs trust is often the best way to guarantee that funds you leave are used for your child’s benefit. Although disinheriting your child or leaving money to other family members on his or her behalf may initially preserve your child’s eligibility for government benefits, your child may someday be left without adequate support if these benefits are reduced or eliminated. Another concern is that creditors may attach money left to a family member if, for instance, that family member is held liable for an auto accident or declares bankruptcy.

If you are interested in establishing a special needs trust, consult an attorney who is experienced in special needs issues (including Medicaid planning), and the laws governing special needs trusts in your state.

Letter of intent

A letter of intent is a document that describes how you want your child to be cared for after you’re gone. Although it’s not a legal document, it can provide important information to guardians, trustees, family members, and others involved in the care of your child. The letter may address such issues as your child’s medical needs, daily routine, interests, likes and dislikes, religious practices, living arrangements, social activities, behavior management, and degree of self-sufficiency. Such a letter can prove invaluable to your child’s caregivers after you’re gone, and can also make the transition to a new living situation as smooth as possible for your child.

Beneficiary designations

With certain assets (such as life insurance policies, retirement plans, and annuities) you must designate beneficiaries and/or contingent beneficiaries. You’ll also name beneficiaries under your will. Although your first inclination might be to name your child with special needs outright as your beneficiary, such a designation could jeopardize his or her entitlement to government benefits. Instead, consider establishing a special needs trust for your child and designating the trust as your beneficiary.

Guardianship issues

Although you are the natural guardian of your disabled child during your lifetime, who will care for your child after your death? Selecting a guardian who can act on your child’s behalf after you die is one of the most important decisions you face. The person you choose must be able to handle the complex financial, legal, and personal needs your child may have.

Depending on the extent of your child’s disability, you may also need to choose a person who is committed to serving as guardian even after your child reaches adulthood. The law doesn’t assume that a special needs adult is incapable of handling his or her affairs. After reaching the age of majority (generally age 18), your child is a legal adult. He or she will be judged capable of handling his or her own affairs unless declared incapable by a court. If such a determination is necessary, the guardian you choose now may need to serve as guardian throughout your child’s life.

Guardian defined

A guardian is someone with the legal power to care for another person and manage that person’s personal and/or financial affairs. A guardian can advise your child, manage assets, and oversee your child’s care after your death. Generally, you’ll nominate a guardian, along with several contingent guardians, in your will. The court has final approval, but it will usually approve whomever you nominate, unless there are compelling reasons not to do so.

Types of guardians

There are two basic types of guardians: a guardian of the person, and a guardian of the estate. A guardian of the person is someone authorized by a court to make only personal and medical decisions about your child. Any medical procedure performed on a child requires consent from the parent or guardian. A guardian of the person is empowered to give such consent for medical procedures and also decide where your child will live. Usually, the court clearly specifies the scope of the guardian’s power. (The guardian will also have to report to the court on a regular basis.)

• A guardian of the estate (also called a conservator) protects and manages your child’s money and other assets. The guardian has the following legal duties:
• To take possession of real and personal property and manage it for the benefit of his or her charge
• To spend the estate for the necessary care and support of his or her charge
• To productively invest estate assets

You can nominate different people as guardian of the person and guardian of the estate, or you can nominate one person to handle both functions.

Caution: Each state has its own laws regarding guardianship. Consult an estate planning attorney before choosing a guardian.

Full guardianship

A full guardianship is also called a plenary guardianship. In this case, the guardian has control over both the personal issues and the estate of your child. This is the most common type of guardianship. Typically, you will choose a full guardianship if your child’s problems are so severe that he or she cannot make any informed decisions at all.

Limited guardianship

In a limited guardianship, the guardian has authority over his or her ward only in specifically defined matters. Otherwise, the special needs child retains some control over his or her own life. The court has to pay careful attention to this type of arrangement to be sure it remains appropriate for the child.

Caution: One problem with limited guardianships is that your child may encounter a legal situation you haven’t considered. You have to anticipate the future when you set up a limited guardianship.

Temporary guardianship

If the court appoints a temporary guardian, it specifies the limited problem or limited time of the guardian’s power. Usually a temporary guardian is appointed only in a situation caused by drugs or momentary illness or in a special medical case.

What to consider when choosing a guardian

You may want to select a relative, friend, or trusted legal professional as the guardian for your child. Here are some points to consider as you make your decision:

• Does the potential guardian live close to your child?
• Does he or she have enough time to devote to your child?
• Does he or she have the interpersonal skills necessary to be an effective advocate for your child?
• Is he or she willing to take on the responsibility?
• Do you trust him or her to keep your child’s best interests in mind?
• Does he or she already have a relationship with your child?
• Is he or she willing to keep up with new programs and opportunities for your child?
• Will he or she adapt to your child’s changing circumstances?
• Does he or she have the financial ability to manage your child’s estate?

Caution: Make sure to periodically review your choice of guardian. Your child’s needs may change, or the person you initially chose may become unable or unwilling to serve as guardian.

What if you die before nominating a guardian for your child?

If you fail to nominate a guardian in your will, or otherwise die before making arrangements for a caregiver, the court may appoint a guardian for your child. If a relative does not wish to serve or does not qualify, the court may appoint a professional guardian who is a stranger to your family. The guardianship process can be expensive, time consuming, emotionally draining, and open to public view. In some cases, though, there are advantages to having a guardian with professional expertise.

Public guardian

If a child with special needs has no individual guardian, the court will appoint a public guardian for the child. Usually, this guardian has many other clients as well so he or she may not have time to watch your child’s affairs as closely as you wish. A public guardian is paid out of public funds, but since the guardian also often negotiates with public agencies, he or she may experience a conflict of interest. Public or nonprofit agencies may also be public guardians.

Caution: A public guardian is usually considered a guardian of last resort.

Corporate guardian

A corporate guardian is part of a company that sells guardianship services. A professional staff or a volunteer manages your child’s care. Usually this type of guardianship is funded by advance payment from parents, life insurance policies, or bequests. The United Way and other charities also support corporate guardians.

What if your child does not need a guardian?

Even if your child does not need a guardian (if, for instance, he or she is already a legally competent adult), he or she may continue to need care, advice, and support throughout adulthood. You may want to ask a family member, friend, or other individual to act as a caregiver or mentor for your child. Make sure, though, that the caregiver you’ve chosen has the power to act on behalf of your child should he or she become incapacitated. This can be accomplished by having your child execute certain legal documents, including a durable power of attorney and advanced medical directives. For more information see Planning for Incapacity.