[Editor's Note: The following guest post was submitted by pediatrician blogger, Margaret Curtis, MD who researched the topic of financial planning for special needs children on behalf of her patients and friends. Dr. Curtis gives us a primer on what she's learned about this often complicated and difficult topic. We have no financial relationship.]
This is an introduction to some of the issues facing families of children with special needs. It is by no means a comprehensive planning guide. As usual, do your due diligence and consult a professional as necessary.
Planning for a child who will require lifelong support can be daunting. You have to consider legal and financial matters, the individual needs of your kid, and the effect all your decisions will have on everyone else in the family. The costs associated with raising a special-needs kid are astonishing. You will have to negotiate a maze of public and private resources with one question at the forefront: how can I ensure that my child is cared for throughout my life and after my death?
How to Develop a Financial Plan to Care For a Special Needs Child
#1 Get Professional Help
You will need professional help, even if you are otherwise a do-it-yourselfer.
You should consult a lawyer with experience in disability law to advise you on
- Estate planning
- Setting up a special needs trust
- Your Durable Power of Attorney
- The help of a professional trustee (paid out of your child’s trust) to oversee your child’s benefits if there is no obvious choice among family or if that role seems too fraught.
You might also want to use a certified financial planner with expertise in special needs.
#2 Make Sure Your Own Finances are in Order
This includes all the traditional areas such as:
- Paying down consumer and student loan debt
- Obtaining adequate short and long-term disability and liability insurance
- Securing health insurance
#3 Look Into Public Benefits
Physicians’ kids generally don’t qualify for most government programs because their household income is too high, with one important exception: Your child may be eligible for Katie Beckett, which waives income requirements for Medicaid so that children of all income levels can receive in-home care. This is a state program, so look up your state + “Katie Beckett” to learn more.
Once your child is over 18, s/he may qualify for public benefits such as Supplemental Security Income (SSI), which is a federal program for people with disabilities. The benefit in 2019 is $733 for an individual. If that individual has more than that amount in monthly income from other sources, or more than $2000 in assets, the SSI benefit is scaled back or suspended. There are important exceptions to the income requirements: food and shelter provided by a non-profit and the costs of impairment-related items required so an individual can work (such as special transportation) are not counted as income.
If you have a child with a significant disability, you know that these income limits don’t cover the basic costs of living and medical expenses – let alone educational and vocational needs. There is also no guarantee that these programs will exist in any form in the future. You may have to plan to support your child throughout his or her life.
#4 Save and Invest
You will need to set aside money for your child’s support in the future, but you have to do this in a way that doesn’t jeopardize eligibility for government benefits as described above.
Special Needs Trusts
Special Needs Trusts allow families to leave property, cash, and investments to a child with disabilities without disqualifying them from programs such as Medicaid and SSI.
There are multiple types of Special Needs Trusts, and the laws governing them vary by state.
- First-Party Trust: A “first party” trust is established to hold assets that belong to the individual, such as the settlement from a lawsuit.
- Third-Party Trust: A “third-party” trust holds assets such as an inheritance or gift to the individual. They can be used in estate planning and are taxed differently than first-party trusts.
- Pooled Special Needs Trust: A “pooled special needs trust” is administered by a non-profit for the benefit of multiple people with disabilities, who each have a separate account within the trust.
The trust will need to be administered by one or more trustees, who are guided by a Letter of Intent written by the parents. The Letter of Intent is not legally binding but spells out the specific needs, goals, and wishes of the person with a disability.
ABLE accounts act like 529 plans, in that money goes in post-tax but grows and comes out tax-free. Unlike a 529 plan, the same individual is both owner and beneficiary, and each owner is limited to one account.
To qualify for an ABLE account, an individual must have onset of disability before age 26 and be eligible for SSI or SSDI. If the beneficiary isn’t receiving SSI or SSDI but has a disability, s/he may be able to qualify with a physician’s certification. You can use this form: https://www.marylandable.org/assets/docs/maryland-able-physician-form.pdf
Not all states offer ABLE accounts but many allow non-residents to open accounts. As with 529 plans, ABLE accounts differ from state to state and you should do some research before you open one. Important questions to ask are:
- Is there a minimum to open the account?
- Annual fees?
- What are the investment options?
- What documents will you have to provide to prove that you are using the money for qualified expenses?
- If you are looking at your own state’s plan, are there tax credits or deductions?
Anyone can contribute, but total annual contributions are limited to the annual tax-exempt gift amount per beneficiary ($15,000 in 2019). The owner of the account may also contribute (up to $12,140.00 in 2019) from their income if their employer doesn’t have a retirement plan. Each state sets its own limits on accumulations in ABLE plans, but these limits must be the same as those for the state’s 529 plan. ABLE accounts are protected in bankruptcy.
Money in an ABLE account can be used for any “qualified” expense, which includes health care, housing, education, employment training, and financial planning. One benefit of ABLE accounts is that the first $100,000 of assets don’t affect the beneficiary’s Social Security eligibility with one exception: any distribution for housing is counted as income for the purpose of calculating SSI. If the account balance goes above $100,000, SSI is suspended until the balance goes below that threshold again. Other benefits like Medicaid are NOT affected by the balance in an ABLE account.
ABLE accounts never impact Medicaid eligibility, but after the beneficiary dies, funds may be used to “pay back” Medicaid for benefits received and then go into probate before the rest is returned to the family.
ABLE accounts and special needs trusts are not mutually exclusive and each have their own benefits. ABLE accounts are easier to set up and administer and can allow the owner/beneficiary some autonomy in managing their own funds. Special needs trusts require legal planning and trustee(s) but have no limit on accumulations. Gains on investments within a special needs trust are taxed, usually at a rate higher than the individual rate.
Term Life Insurance
Term life insurance is usually recommended for a parent who is the primary earner, less so for a parent who stays home full- or part-time. If you have a child with disabilities, however, you already know that caring for this child is (more than) a full-time job. Term life insurance on the caregiving parent could help replace the care that parent provided in the event of his/her untimely death, or replace the income lost if the surviving parent then assumes caregiving responsibilities.
Second-to-die (or survivorship) insurance essentially insures both parents and pays out after both parents die. This kind of insurance can be helpful in that it is less expensive than two separate policies (because it essentially only provides one benefit), and older or less healthy parents may still be able to qualify.
Whole Life Insurance
Readers of the White Coat Investor know that whole life insurance (or variable life, universal life, etc) is generally a poor financial product. Whole life insurance is still heavily marketed to families with special needs children because it promises a lifelong benefit.
Most families plan to drop their term insurance coverage when their children reach financial independence. This is because children with disabilities may depend on their parents throughout their lives and insurance that pays out upon a parent’s death may be appealing.
The usual caveats about whole life still apply, however: poor investment returns, high fees, and surrender charges. Most physician families will be able to save enough in a trust or with inheritable assets that they can avoid whole life insurance.
#6 Estate Planning
Consider the types of assets you leave and how. In general, most of your child’s inheritance should go into their special needs trust in order to protect their eligibility for government assets. This is also true for inherited retirement accounts, pensions and survivor benefit plans (SBP). You can ask your retirement plan administrator or SBP counselor if receiving these benefits impact SSI/SSDI eligibility.
You may have to make the difficult decision to leave a disproportionate amount of your estate to support your special-needs child. In my opinion, these decisions should be made openly and, when children are old enough, with their knowledge. Doing so may not totally eliminate resentment on the part of siblings, but at least it will avoid unpleasant surprises when the will is read. All your kids are more likely to thrive with open and honest communication.
There are many more financial and legal issues than I have covered here. You may have to make some difficult decisions, even as a high earner, that other families don’t face. Early retirement may have to give way to working longer in order to fund your child’s future.
For more information, see the following resources. I have not used the services of any of the organizations listed here so can’t vouch for them personally; I also have no financial relationship with any of these organizations.
- Special Needs Planning Guide by Haddad and Nadworny. The most comprehensive guide on financial, legal and emotional topics.
- https://specialneedsplanning.com/ The website of the authors of the Special Needs Planning Guide.
- https://www.specialneedsalliance.org/ : special needs lawyers with experience in guardianships, special needs trusts and public benefits.
- https://specialneedsanswers.com/USA-special-needs-planners : special needs lawyers, financial planners, and trust officers.
I hope these resources can help you put together a financial plan that lets you get back to the important, daunting and wonderful task at hand: raising and enjoying your kid.
Do you have a special needs child? What have you done to ensure they are taken care of financially? What resources have you found helpful? Comment below!