They're typical new clients: A couple approaching middle age, 2.4 kids, a nice home and comfortable income looking to plan for a financially secure future. But one of their children is disabled. You could craft a dazzling retirement and estate plan, yet actually jeopardize the family's financial future. Your plans could wind up disqualifying their disabled child from receiving government benefits. What's worse, the government could come after them to repay aid the child already has received. And if the couple fears they'll have to dip into assets earmarked for siblings to pay for the child's expenses in adulthood, hold on for a family feud.

A different set of financial planning rules kick in for families with special needs children. Forget about using UGMA or UTMA accounts for the special needs child: Nice tax savings, but there's a big penalty to pay if the child uses or ever wants to use government support programs. Forget about an estate plan that neatly provides equal inheritances for all the couple's children. The special needs child will need a bigger share of assets.

“Families want the comfort of knowing how much it will cost so they can save the money,” says John Nadworny, a fee-based adviser with Bay Financial Associates in Waltham, Mass., a financial planning firm specializing in special needs families. “The reality is you must have as much as possible set aside.”

Advisers who learn the rules to help a client plan for a disabled child's future are in a unique position to impact an extended family. Close to 15 million families in the United States have special needs children, says Christopher Sullivan, head of Merrill Lynch's special needs financial group. To work effectively with a family, Sullivan says, an adviser needs to assemble a team that includes parents, siblings and grandparents as well as the child's social worker, doctors, therapists and teachers. An attorney familiar with special needs planning must be brought in to set up the right kind of trust.

About 800 Merrill Lynch reps have used the firm's special needs financial planning process. The firm first gives reps a specialized questionnaire to create a special needs supplement to its Financial Foundation report, then it offers an online calculator to determine the lump sum a disabled child will need for a lifetime. Reps finally link up with firm specialists to help a family's attorney understand the unique needs of the disabled in drawing up wills and trusts.

“You're planning for two generations,” Nadworny says.

A family with a young special needs child has quite a financial education in store as the child nears adulthood. “There's very good financial support [from the government] until a person reaches adulthood. Then you fall off the face of the earth in terms of funding,” says Kirsten Nyrop, executive director of United Cerebral Palsy.

At age 18, disabled individuals unable to earn a self-sufficient wage become eligible to receive a monthly income allowance through the Social Security Administration's Supplemental Security Income (SSI) program. They also qualify for payment of health services through Medicaid. All of these benefits can be cut off immediately if the disabled person earns or has assets worth more than $2,000 (excluding a home, car and household possessions). The government allows a disabled person to receive only $60 of unearned income per quarter. And the individual must be incapable of earning more than $500 per month.

A family can have an attorney draw up a trust and adjust their will once they know a child will need lifetime support. The family may be told to make a large gift in their will to a sibling to provide for the disabled child's care. Known as a “morally obligated gift,” this strategy leaves the disabled person vulnerable. The sibling can't be legally forced to use the gift to benefit the disabled person and might be taxed at a higher rate than the disabled child or trust. And should the sibling die before the disabled person, the money will go to the sibling's heirs. The money also can be claimed by creditors or the sibling's spouse in a divorce settlement.

Some attorneys will add a paragraph about special needs to a custodial account document. “They often use trigger words such as ‘support and maintenance’ or use a Crummey clause,” says Jeffrey Minde, a special needs estate planning attorney in Ft. Lauderdale, Fla., and president of National Special Needs Network, an information clearinghouse. A Crummey Trust allows the beneficiary to withdraw $10,000 a year as part of the annual exclusion.

But if a child already is receiving government benefits and your client has a trust that says it's for the child's support, the Social Security Administration likely will do a three- to five-year look back at the child's assets, Minde says. The child will end up ineligible for government benefits for those three to five years. The government also can require the trust to reimburse the cost of all government benefits provided so far.

A special needs trust is the essential tool to protect a disabled child's financial future. Also known as a supplemental needs trust, the special needs trust preserves eligibility for federal and state benefits by keeping assets out of the disabled person's name. The trust does this by earmarking all assets for expenses other than basic support. The trust can't pay for room and board, but can pay for the following needs: medical/dental expenses, annual checkups, transportation and vehicle purchase, equipment, training programs, education, insurance, rehabilitation, vacations and a home health aide.

The special needs trust is irrevocable and must be set up by parents or a third party. It can be part of a will or structured as a living trust. The trustee has discretion to use assets for the benefit of the disabled person and must handle all distributions from the trust. When the disabled person dies, unused assets can go to other heirs. If parents feel their child might be able to handle their own finances as an adult, they can allow the trustee to evaluate competency. The assets can then be transferred to the child.

There's a lot of flexibility in funding the trust. “You can be impoverished, on Medicaid and have the Taj Mahal in the trust,” Minde says. The trust can be a life insurance beneficiary and can hold money from legal settlements. Minde advises clients who are receiving a structured settlement for a disabled child to get a court order to require the insurance company to put the money directly into a special needs trust. If the disabled person receives settlement money even for an instant before transferring it to a special needs trust, the government treats it as income and will yank eligibility.

Advisers need to examine every source of potential income to the disabled child. “All beneficiary designations must be changed,” says Theresa Varnet, a special needs estate planning attorney in Chicago. “Parents often will change beneficiaries in their wills, but forget their insurance and 401(k)s. If a parent leaves an annuity to a special needs child in a will, a financial planner typically will recommend the annuity be paid out as a small monthly sum for the rest of the child's life rather than as a lump sum. But if the annuity is paid out monthly, the government considers it unearned income and will subtract the amount dollar for dollar from government aid. If the lump sum is paid directly into a special needs trust, that won't happen,” Varnet says.

Alert anyone who's likely to gift assets to the disabled child. “If a grandparent isn't in the loop about the $2,000 [asset cap], a great deal of damage can be done if the grandparent simply puts a check in the child's name,” Sullivan says.

Choosing the right trustee is central to a special needs trust strategy. Varnet recommends a corporate trustee.

“The rules about how goods and services must be paid for often confuse a family member trustee,” she says. For example, a family member or sibling acting as trustee might give the disabled person pocket money and end up jeopardizing government aid. Plus, the ongoing burden of making decisions and keeping detailed records makes it difficult to discharge the duty.

Minde recommends having a family member as co-trustee. He's seen situations in which a corporate trustee is so concerned about conserving trust assets, that the disabled person receives low-quality services.

The trend is moving away from corporate trustees, Sullivan says. Merrill Lynch discontinued serving as corporate trustee for special needs trusts two years ago. Now the firm will serve only as an agent for a trustee, for trusts with at least $500,000, and only in a handful of states. For everyone else, the firm offers a CMA Account for Trusts to help trustees manage the assets.

How much money should be put into the special needs trust? Advisers suggest starting with the following calculation: Determine the potential needs as an adult, compute the present value of those needs, then total the parents' assets that would be available after death, disability or retirement. Finally, estimate the dollar value of available government programs. Monthly SSI benefits range from $350 to $500. If a person lives in a group home, the state typically will take three-fourths of the monthly benefit, Varnet says, leaving a person as little as $30 to $50 a month for living expenses. She advises funding a trust with $250,000, which should provide about $1,000 a month, assuming the trust earns 5% after taxes and expenses.

Merrill Lynch expects to have an online special needs calculator available to the public early next year.

Nadworny advises parents to factor in the cost of hiring an advocate for their adult child, someone who can navigate the government aid system. He typically advises parents that money should be set aside to afford a $100,000 condo and $1,000 a month for the rest of the child's life.

Eric Spindt, a Prudential Securities broker in Boston, assumes a 6% to 10% rate of return on assets, adjusts for inflation over time and sets a goal of generating $32,000 a year in the special needs trust for the child's lifetime. He's careful to do a comprehensive financial plan for the family before putting money into a trust.

“Parents often fear that if they leave a large portion of assets to their special needs child, they may need to use those assets for their own long-term care,” Spindt says. “We need to make sure what we do for the child won't adversely affect another part of the parents' plan.” About 30% of Spindt's business comes from special needs families.

Life insurance is the best funding vehicle. The simplest approach is a survivorship, or second-to-die policy, which covers both parents and pays out on the death of the second. The special needs trust is named as beneficiary. “Financial planners usually use these policies only for wealthy families, just to provide enough for estate tax payments,” Varnet says.

To paraphrase the 12-step program's serenity prayer: Families with a special needs child need to accept the things they cannot change, and change the things they can. Financial advisers can help them do both.