Special needs children need special financial plans
When Nadine Vogel's daughter Gretchen
was born, the doctors said she probably wouldn't live more than
two days. Gretchen, born with a neuromuscular disorder, couldn't
swallow and needed to be fed through a tube in her stomach. There
were other medical issues as well.
At her daughter's side for 18 hours a day, Vogel barely
"I was afraid that I'd fall asleep at the wheel
and die in a car crash," she says.
If she and her husband died, she wondered, what would
happen to Gretchen? Before the child left intensive care, the Vogels
put together a plan to make sure her needs would be met if something
happened to them.
Seven years later, the Vogels went through the process
again when Rachel, their younger daughter, was born with a rare
"When I'm gone and my husband is gone, life will
change for them," Vogel says. "What I wanted to make sure
was that it wouldn't change in any way it didn't have to. I want
them to have all the things I deem important. I wanted to give them
the ability to become as independent as possible."
Financial planning for families with special needs
children is complex and unique. Structured properly, it can assure
that a child retains the same quality of life that his parents provided.
But if the financial and legal arrangements are mishandled, a well-intentioned
parent could destroy a son or daughter's eligibility for essential
-- and expensive -- services.
Social Security provides special-needs individuals
with money for food, shelter, clothing and medical care, according
to Marla Kraus, executive director of Special
Needs Advocate for Parents, a national nonprofit organization
that Vogel founded. Having even a modest amount of assets in their
own names can cut them off from benefits.
"The classic situation is a parent leaves the
child the house," Kraus says. "That could be a disaster."
A financial planner, Vogel had a wealth of information
at her fingertips. After years of fighting to obtain services for
her daughters, she also had a huge storehouse of experience to share.
In addition to starting SNAP, she created MetDESK,
the Division of Estate Planning for Special Kids at Metropolitan
Life, where she is a vice president.
The enormity of the task creates one of the biggest
problems for special needs families -- a failure to plan.
"The federal law says if you leave a person with
special needs with more than $2,000, they'll automatically lose
benefits," Vogel says. "It kind of paralyzes people to
not doing any planning or do the wrong planning."
But without proper planning, a family member with
special needs could become a ward of the state after his parents'
"His standard of living drops dramatically to
a level where he lives in the most basic sustenance," says
Christopher D. Sullivan III, vice president and manager at Merrill
Needs Financial Services Group. "You can see that the underlying
fundamental problem behind it all is lack of planning and lack of
While every family's situation will be unique, there
must always be a special needs trust, a letter of intent, a trustee
and a guardian.
The special needs trust
A special needs trust has one purpose: to leave
assets to care for a loved one while protecting his eligibility
for government benefits.
It needs to be drawn up by an
attorney with background in that area.
Financial planners stress that special needs planning
requires a qualified team that includes a family member, a social
worker or medical professional to discuss ongoing care needs, an
attorney and a certified public accountant.
Don't make the mistake of using a relative or friend
if that person lacks the proper experience.
Ask the attorney and CPA how many special needs trusts
they've handled in the past year, what percentage of their client
base is special needs families, and how well-versed they are in
government benefits eligibility.
"This kind of estate planning is different,"
Kraus says. "Here, oftentimes, you need to create money, not
It's critical, Sullivan says, to alert extended family
members about the existence of the trust.
"Often, parents neglect to tell the relatives
-- like aunts, uncles, grandparents -- not to make a special gift
in the name of the special needs child," he says. "Once
they get more than $2,000 in assets, it jeopardizes their government
support. If they want to make a gift, they should write checks to
the trust, not to the name of the child."
When considering funding sources for the trust, parents not only
have to consider their own longevity for retirement, but the potential
life spans of their children.
"That's a very positive and wonderful thing to
think about; there's no fear in that," says Adriane Berg, editor
Financial, a family newsletter.
"Your decisions for what happens to them after
you're gone depends on knowing they'll be there for a long time.
So you filter your decisions through this realization. You're not
dealing with a 12-year-old. It's for the benefit of a 50- to 90-year-old."
The most common source of funds in a special needs
trust is life insurance. Vogel recommends a second-to-die, or survivorship,
policy, which only pays out when both named policyholders die and,
thus, is more affordable than regular policies.
"As long as one parent is alive, we're going
to take care of our kids," she says. "If we have to work
four jobs, we'll do it. It's when we're both gone, we want to make
sure our children don't become a financial burden and get the care
Vogel and other financial planners caution against
considering a house or an individual retirement account as the principal
asset funding the trust.
"The house is something you should leave; don't
rely on it as a key asset," Vogel says. "401(k)s aren't
a bad thing to leave, but how long will you have contributed to
that plan when you die? Will you have used a lot of the money? Don't
count on it as the sole asset."
Besides, that's what the parents will live on after
"You have to make sure your retirement is set
first," says Robert Kosbie, a CPA in San Diego, who works with
several special needs families. "How will they help their special
needs child if they can't take care of themselves? It's not being
cruel -- these are just the things we have to do."
For parents who can afford it, Berg suggests considering
an immediate annuity, "which no one likes except people with
"You take a lump sum of money and give it to
an annuity company in return for a lifetime income, no matter how
long they live," she says. "If they live to 120, that
amount will come to them."
For individuals with substantial retirement funds,
Berg also suggests taking advantage of the new IRA stretch-out rule,
which allows the fund to continue to accumulate tax-deferred after
the account holder's death. An IRA will must be attached to the
form filled out with the IRA custodian.
"It's not a will because you don't want your
estate to get the money," she explains. "It goes to a
separate trust, and all the things you've planned get funded by
Parents considering that option will need to make
sure their IRA custodian permits it. Not all of them do, Berg says.
Another savings tool to consider is the Educational
IRA. Under the tax bill passed in June 2001, the rule was changed
that made the earnings subject to tax and penalty if they weren't
exhausted by age 30.
"Congress wanted more flexible rules for the
benefit of special needs students," says Dave Evans, vice president
of retirement and financial planning with the Independent Insurance
Agents of America. "In the case of a special needs beneficiary,
the age 30 ceiling is lifted."
Plus, the annual contribution limit was increased
from $500 to $2,000.
"As that's earning money, there's no issue about
the earnings offsetting benefits," Evans says. "If you
do $2,000 and fund it for 20 years, to me, that could be a significant
It could also cover a wide range of training opportunities.
"Clearly, you're not talking about spending money,
but you could be extremely broad," he says. "The educational
IRA isn't a panacea, but it's another club in the bag."
Letter of intent
The letter of intent is your instructions to the trustee and the
guardian on how you want your child cared for when you're gone.
It's not a legal document, so it should be witnessed and notarized.
If the child has cognitive ability, he should be involved in drafting
It should be specific, and cover such issues as health
care, education, living arrangements and religious preferences,
Vogel says. If your child loves baseball and you want him to be
able to go to every home game, this is the place to discuss that.
"Share it with the guardian because it tells
them what you expect," she says. "When you just ask, 'You're
always going to make sure Johnny's taken care of, right?' it's very
vague. The name and address of physicians, areas of specialty, doctors
you never want them to go back to, put that in."
Choosing who will care for your
In addition to establishing and funding a special needs trust, the
most critical decisions for parents are the selection of a trustee
and a guardian. The trustee will have control over the child's money
and its investment; the guardian will be responsible for his day-to-day
care, including life-and-death medical decisions.
It's vitally important because "when someone
turns 18, they're a legal adult whether they function as one or
not," Vogel says, a situation that can leave a special needs
loved one an easy target for exploitation, especially if he has
Some families may decide to use the same person as
trustee and guardian; most choose two people, or may use a family
member as guardian and a financial institution as a trustee. Since
the individuals will have responsibilities to the child for his
lifetime, successors need to be selected as well.
Many parents mistakenly assume that their able-bodied
children will take over responsibility for caring for a disabled
"In most cases, they don't want that responsibility,"
Sullivan says. "After they've seen what their parents have
gone through, they don't want to make that sacrifice, unfortunately."
Once a trustee and a guardian have been selected,
it's important to review the plan on a regular basis, or at least
after a major life event, such as a marriage, divorce, a job change,
or the birth of a child.
"An older brother says, 'Yeah, I'd be honored
to (be the trustee).' But that was when he was single and starting
his career," Kosbie says. "Now, he's married and lives
halfway across the country. It may not be practical anymore. You
need to ask if the trustee selections are still valid. It's more
important than in normal financial planning because the trustee
may need to be more hands-on."
With all the decisions to make, parents would do well
to take this one piece of advice from SNAP's executive director.
"Be compassionate with yourself," Kraus
says. "Nobody wants to think about their own death. Lots of
people don't plan for their own wills. These are hard decisions."
-- Posted: Oct. 24, 2001