Tune up your finances
Parents of children with special needs are faced with daily challenges. The take-it-one-day-at-a-time approach may work most of the time, but experts say these parents should pause to consider what may happen to their special-needs child if something should happen to them. Odds are good that many of these children will survive their parents.
Yet planning beyond their own lifetimes is a task that many parents have not gotten around to, according to a 2008 survey by The Hartford Financial Services Group. Some 62 percent of parents have no long-term care plan in place for their special-needs child.
Among parents with a plan, half said they plan to leave money directly to their child, and 58 percent name their child as a beneficiary.
Either of those plans could disqualify a child from eligibility for government benefits and services, which impose strict limits on the assets a beneficiary can have in his or her name.
Financial planning for a special-needs child can be tricky, but if you start with a good road map, you’ll avoid costly financial mistakes and have peace of mind that your child will be taken care when you and your spouse are gone.
- Get the right experts to help.
- Start with a letter of intent.
- Draft a will.
- Understand government benefits.
- Establish a special-needs trust.
- Name a trustee and guardian.
- Determine how to fund the trust.
Get the right experts to help you
When Karen Greenberg’s son Ricky was diagnosed with autism, doctors told her to plan for the likelihood that he would never hold gainful employment and that he would require financial assistance well into his adult life.
Greenberg, a Certified Financial Planner based in Delray Beach, Fla., says the advice from her attorney at the time was to leave her estate to her youngest daughter.
“As a financial planner, I knew that was very poor advice because contingencies like divorce and lawsuits could befall even the most diligent and protective sibling,” she says.
After doing research at a law library, she decided to establish a third-party special-needs trust, also known as a supplemental needs trust, to provide for Ricky financially while protecting government benefits such as Supplemental Security Income and Medicaid.
She says the trust she established for her son is usually beyond the reach of creditors of the child and the parents and is not available in divorce proceedings if the child marries.
Ricky, now 21, lives in a group home in New York that is completely funded by Medicaid. Greenberg says it would cost more than $100,000 per year out of pocket otherwise.
Greenberg was fortunate in having a financial planning background, but the majority of parents are often in a quandary about financial planning for special-needs children. It’s a good idea to get together a team of experts that includes a medical professional familiar with the child’s health care needs and an attorney who is well-versed in the area of special-needs trusts and government benefits.
Start with a letter of intent
The letter of intent really is the backbone of your financial plan because it serves as your instructions to the trustee and guardian on how to care for your child. As part of your child’s life care plan, it describes your child’s medical history, current status and other important information that can guide caregivers in the event of your death.
Ideally, it should be a fluid document that is started when your child is young and updated periodically as your child grows.
It should describe medications your child takes, attending physicians and developmental milestones. It may include things such as physicians to avoid, and your child’s favorite activities and food preferences. It should also include the child’s Social Security number and birth date as well as the parents’ financial information.
Potential guardians should get copies periodically as the letter is updated.
“We had a lot of doctors involved in Ricky’s case and a lot of things that we needed to be aware of, and it was impossible to keep all of that stuff straight,” Greenberg says. “Parents have a lot of information in their heads, but they really need to write it down.”
Draft a will
A letter of intent is an excellent way to create a record of your child’s medical history and milestones, but it doesn’t have as much legal clout as a will.
No one understands your special-needs child better than you, the parent, but without a will, the door is wide open for the courts to decide how your assets will be distributed — which may or may not be in your child’s best interests.
Not only does a will specifically detail how and when your assets will be distributed, but in conjunction with a well-thought-out financial plan, you can avoid unnecessary taxes and expenses.
Tune up your finances
Understand how government benefits work
Government programs such as Supplemental Security Income, or SSI, and Medicaid provide basic support services, but they are income sensitive. In the case of Medicaid, eligibility can vary from state to state.
In general, to be eligible for such benefits as SSI, a child must be disabled and have limited resources.
To begin with, special-needs children younger than 18 must have an impairment that meets the government’s definition of disability, which is a physical or mental impairment that seriously affects the ability to function. In addition, the disability must have lasted, or be expected to last, at least one year or result in death to qualify for SSI benefits.
Many special-needs children won’t qualify for federal benefits prior to age 18 if their parents make too much money. After age 18, to be eligible for SSI benefits, the adult child cannot have earnings that exceed a certain income threshold. Also consider that the adult child with special needs may be eligible for Social Security Disability Insurance benefits, which are based on a parent’s earnings record.
In most states, if a special-needs child qualifies for SSI benefits, he or she usually can get Medicaid to help pay medical bills. Always check on Medicaid eligibility in your individual state, though, because even if the child is not eligible for SSI benefits, the child still may be eligible for Medicaid under other state rules.
Establish a special-needs trust
Special-needs trusts are established to manage assets for a beneficiary.
The assets are usually used to pay for rehabilitation, educational services or medical services not covered by other sources, but they can also be used to pay for quality-of-life enhancements, such as entertainment or vacations.
Special-needs trusts can be complicated and costly to establish, so it’s a good idea to hire an attorney who is well-versed in estate law, taxes and government benefits — particularly Medicaid and Social Security.
Costs can range from $2,500 to $5,000 or more to establish a special-needs trust depending on the circumstances and other factors, according to Vincent J. Russo, a Westbury, N.Y.-based attorney and co-founder of the Academy of Special Needs Planners.
Ideally, your attorney should have an extensive network of community resources because families often need help with quality-of-life issues beyond establishing the trust.
“It’s not unusual for a parent to call me with concerns about a child having trouble with schooling or who is having a housing issue,” he says. Oftentimes parents call him if they need a therapist or a financial adviser to help with managing assets or purchasing life insurance, he adds.
Selecting a trustee or guardian
Parents often look to siblings or close relatives when choosing a trustee or a guardian, but that’s not always a good idea if they can’t balance a checkbook or aren’t parent material.
“With a trustee, you’re looking for someone who has good judgment with money and who is responsible with certain things like investment management or tax returns,” Greenberg says. “With a guardian, often it’s the person that’s best with the child.”
In some cases, it may be a good idea to select two people to act as co-trustees, but you’ll want to avoid choosing a husband and wife in case they divorce. Greenberg says it’s a better idea to choose a relative from each side of the family.
Keep in mind that trustees don’t have to be human beings; they can be financial or nonprofit institutions as well.
In cases where there are no related trustees to choose from, parents can transfer funds to a pooled trust run by a not-for-profit organization. This type of trust is managed for a number of different beneficiaries, with all funds kept separate from one another. The Web site of the Academy of Special Needs Planners provides a resource of pooled trusts that exist nationwide.
Determine how you will fund the trust
Special-needs trusts are commonly funded by the proceeds of life insurance policies, but they can also be funded by cash gifts or from investments such as retirement fund proceeds or IRAs if the IRA custodian permits it.
Well-intentioned family members often want to help by leaving money directly to their special-needs child.
Too often though, they make the potentially costly mistake of naming the child as a beneficiary. Even high-functioning individuals may not have good money-management skills. And as mentioned above, gifts willed directly to a special-needs child could jeopardize government benefits.
“Instead of naming a child individually, you should name the special-needs trust for the benefit of the child,” says Cynthia R. Haddad, a member of the board of directors for The Arc of Massachusetts and a Certified Financial Planner based in Waltham, Mass.
Regardless of how the special-needs trust is funded, many experts recommend not funding it until the death of both parents. The funding of a trust can be accomplished through specific instructions left in a will, called a “pour-over will.” This type of will “pours” specified property or assets owned at death into the trust that had been previously set up.
“That’s more common of a planning strategy simply because once you’ve funded a special-needs trust and put money into it, you have to file a separate tax return,” Haddad says. “It makes the trust irrevocable, and you really can’t change anything.”