Nuts and Bolts of Special-Needs Planning
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This article is excerpted from Minoti’s book, Beyond a Parent’s Love, which is available from Amazon using the link on this page.
It can take many years for parents to start thinking about future planning for their child with a disability. The initial years are struggles between diagnoses, prognoses, treatments, education, finances, denial, confusion, and finally acceptance of the reality of a special-needs child. Usually when the child enters the teen years or approaches high school, parents begin to worry about the financial planning process and future strategies.
Planning for family members with special needs can be overwhelming, especially when many decisions must be made that have lifelong consequences. The best way to proceed is with a team of professionals specialized and experienced in planning for those with special needs. Planning is best done in phases depending upon the age of the special-needs child and the parents.
Professionals can include a financial planner, estate planning attorney with elder-law and special-needs background, an accountant familiar with tax filing of a special needs trust, social workers, housing specialists, and advocacy specialists. Some professionals may not be needed until the parents begin transitioning their child into independent living and planning for their own retirement.
This article describes the planning components necessary for special-needs planning. Providing lifelong care for a child with a disability is a partnership between parents’ own planning and government programs available for those with special needs. Parents’ planning entails both legal and financial considerations. Each segment of the planning process requires thorough understanding of the law, government benefits, the disability of the child, and the financial planning necessary for the parents and other members of the family. I provide basic information only. Readers, including professionals seeking more in-depth information on special-needs planning, may refer to a suggested reading at the end of this article.
Basic planning considerations
Planning for the future of a child with a disability begins with devising a financial plan for the parents. This entails an inventory of assets and liabilities and an estimate of the size of their future estate through savings and growth. Parents’ planning includes several important components, including their retirement-income needs, long-term care needs, and financial security of a surviving spouse in the event of the untimely death of the primary wage earner. Planning for the education expenses of the other children in the family should also be considered. And review is required for all insurance and investment options to fund the specific needs of the child.
In addition to standard planning considerations, professionals and parents must carefully analyze the special-needs requirements of the special-needs child.
The following questions are a starting point for discussions between planners and parents of a child with a disability:
- What is the age of the child and the nature of the disability?
- What is the estimated life expectancy of the child?
- Where will the child reside after the parents retire and after the parents pass away?
- Does the nature of the disability require the child to live in a group home or a place where special care can more adequately be provided?
- What is his or her earning potential and ability to survive without ongoing care and supervision?
- What are the major expenses today, and how will they change in the future?
- How will the future needs of the other children and the retirement plans of the parents be affected?
- How can the child be ensured to remain eligible for government benefits?
- Are there other family members who may help provide care and supervision today and once the parents have passed away?
Planning should also assume the worst-case scenario. Parents can assume a child will have a normal life expectancy and not be able to look out for himself or herself in the future. The child will be better off if the proper precautionary plans are in place even if the situation does not turn out as dire.
Anticipating retirement needs of the parents and size of the estate are challenging, especially as average life expectancies lengthen. Yet it is vitally important to do so when the future of a child with a disability is at stake. Assets that may be left for the child should be identified early to ensure that assets will grow for financial support in the future.
Government assistance programs
For most families, providing funding for lifelong care of a special needs child is cost prohibitive. Government benefits for a person with a disability are crucial for the financial security and quality of care. These benefits should be addressed at the beginning of the planning process.
SSI and Medicaid
Supplemental Security Income (SSI), consists of federal funds managed and operated by the Social Security Administration and a small portion paid by the state government in some states including California, Delaware, District of Columbia, Hawaii, Iowa, Michigan, Montana, Nevada, New Jersey, Pennsylvania, Rhode Island and Vermont. The SSI benefits are entirely needs-based, or welfare. Children with disabilities become eligible after their 18th birthday unless their parents’ assets and incomes are below certain levels. In such cases, they can be eligible at any age. SSI consists of a monthly income and is accompanied by Medicaid. This income varies depending upon where the child lives. It can be reduced if the child lives in a home funded by the state or federal government, such as a group home.
In general, Medicaid is a needs-based government-benefit program that supports the elderly, blind, disabled and poor. It represents a partnership between state and federal governments that have their own eligibility standards. Medicaid is automatic if a person is eligible for SSI benefits. Medicaid provides for various medical benefits, including medication and other key long-term mental health services, benefits such as group homes, workshops, job training programs, respite, and transportation that the disabled individuals need. Since it is difficult to obtain health insurance for a person with a disability, Medicaid is often considered the most important government benefit.
SSI and Medicaid benefits are needs-based programs. All recipients must meet eligibility requirements for assets and income. For years, rules have required that unmarried individuals cannot have more than $2,000 in cash or other countable assets. For employed individuals, the compensation level must be below a certain dollar amount. The recipient can own a burial plot, prepaid funeral services, and life insurance with low limits. Personal residence, cars, and other personal items such as a computer, video games, and iPads are considered exempt assets for SSI and Medicaid purposes.
Medicaid waiver is a lesser-known program for those with severe disabilities. Many people who qualify for waiver services are not aware that they exist. Families struggle to provide care, creating economic, physical, and emotional strain. States do not educate people about those programs, and it is often only through crisis that people realize help is available.
The 1915(c ) waiver is known as the “home and community-based services waiver” (HCBS) because it allows states to treat certain Medicaid populations in home or other community-based settings rather than in institutional or long-term care facilities such as hospitals or nursing homes.
The waiting period to get onto a waiver program can be many years, and it varies by state. Unfortunately, waiver eligibility does not transfer from state to state.
States can offer a variety of unlimited services under an HCBS waiver program. Programs can provide a combination of standard medical services and non-medical services. Standard services include but are not limited to case management (i.e. supports and service coordination), homemaker, home health aide, personal care, adult day health services, habilitation (both day and residential,) and respite care. States can also propose “other” types of services that may assist in diverting and/or transitioning individuals from institutional settings into their homes and community.
SSDI and Medicare
Upon the retirement, death, or disability of their parents, individuals previously receiving SSI often begin receiving Social Security survivor or disability insurance (SSDI). These are non-needs-based benefits, and survivor benefits are funded by the federal government through FICA taxes. Payments are based on the Social Security taxes the parents have paid into the system. The child’s disability must be diagnosed before age 22. The benefits may not have asset requirements for eligibility. However, Medicare alone will not be sufficient, and Medicaid is an extremely important benefit to maintain.
The individual with a disability may still need to stay at or below the asset level required by SSI to continue receiving Medicaid. Children with disabilities may also be eligible for other government benefits programs such as food stamps, veteran’s benefits, and housing assistance with the U.S. Department of Housing and Urban Development (HUD.)
If parents ignore eligibility requirements and/or inadvertently provide additional income and assets to their children with disabilities, the government benefits will be lost. Even well-to-do parents should not disregard these requirements. All children can benefit from government-funded training workshops and opportunities to work and interact with others.
Although the government benefits are extremely important, they are subject to changes due to budget constraints. The rising population of adult children with disabilities and the elder population requiring long-term care have strained funding available for Medicaid. Planning for special-needs children requires regular review to stay current.
Implementing the plan
In a traditional and comprehensive financial planning program, planners and parents discuss all financial planning matters as well as estate planning strategies. During their lifetimes, most parents complete their wills, trusts, and other legal documents that describe how their assets will pass to their heirs. Parents of children with disabilities are best served by leaving the inheritance in a special-needs trust, also known as a discretionary or supplemental trust. There are two basic types of special-needs trusts: a third-party trust and a first-party (also known as a self-settled) trust.
The trust is established by the third party such as parents or other family members for the benefit of a child with a disability. It is funded with the assets of the third party. These trusts are used because the children have limited assets to remain eligible for government benefits. The language of the trust is important to ensure that future government benefits are not lost or reduced. The wording emphasizes that the trustee will use his/her discretion and use income and or principal of the trust to “enhance the quality of the life” of the child with a disability.
It also specifies that the principal and income will only supplement the government benefits, not replace them. It can provide items such as travel, job training, therapy, and medical expenses not covered by Medicaid, plus hire an advocate to assist in the care of the child. Upon the death of the special-needs child, the remaining assets in the trust are distributed to the named people, usually siblings of the person with disabilities or their heirs.
A third-party special-needs trust can be created “testamentary,” where the special-needs trust is a part of the parents’ trust and becomes effective after the death of the parents. But it is practical to create a stand-alone revocable trust. Some states require the special-needs trust to be irrevocable, and irrevocable trusts cannot be changed once they are created. Care should be taken to have flexibility in the irrevocable trusts to avoid creating a new trust to make changes or be processed through the probate court. The process is coordinated with the parents and other family members’ legal documents. These are generally funded upon the demise of the parents.
First-party trust or a self-settled trust
This is usually funded with the assets of the person with a disability. It must be established and funded by a parent, grandparent or the guardian of the person with a disability, or by the court for a person with a disability under the age of 65. The trust is usually irrevocable, and the special-needs person is the only beneficiary of the trust. The trust is usually funded with a settlement resulting from a tort action or inheritance received by a person with a disability received inadvertently. Upon the death of the person with a disability, the remaining assets of the trust must first be used to pay back any state medical agency providing benefits. Any amount remaining can be distributed to the heirs of the person with a disability.
“Pooled income” is another alternative, often established by a not-for-profit entity in which the small amount of assets of many trusts are combined for investment purposes but are managed individually for distribution purposes. A master-trust document is adopted to govern the trust. A pooled trust can be a self-settled trust or a third-party trust, depending on whether the assets used to fund the trust belong to the special-needs person or to a third party. Some pooled trusts provide that assets remain in the pool when the special-needs person dies. The assets are retained by the trust for the benefit of other beneficiaries of the master trust.
Other important considerations
Letter of intent
This is one of the most important non-legal documents that details all the appropriate needs and care instructions required by the special-needs child. The legal documents such as the special-needs trust and powers of attorney are necessary to ensure that the child’s affairs are handled in the most effective and efficient manner. The letter of intent communicates crucial information to all parties who may assume some responsibilities for the child, both during the parents’ lives and following their deaths.
The letter of intent should list names and contact details of family members, medical professionals, and legal representatives. It should provide the details of the mental and physical disabilities that affect the child’s well-being, as well as descriptive history of the child’s family life and past and current living arrangements. It should include a section about jobs held, assets owned (if any), and government benefits received. The parents should also provide relevant personal information such as likes and dislikes, entertainment choices, dietary needs, other medical issues, and even religious affiliations. Legal information such as guardianship, appointment of trustees, existence of wills, power of attorneys, and other important documents should be included.
By creating the letter of intent and updating it periodically, parents can help ensure that their child with disability will be able to maintain the same quality of life to which he or she is accustomed. A letter of intent gives the parents peace of mind in knowing they have done everything they could to provide for their children even after they have both passed away.
A guardian is a court-appointed individual responsible for making financial, health care, and other personal decisions for a person who has been deemed mentally incapacitated by the appropriate court. Since there is no federal statute related to this issue, state laws determine when someone can be declared incompetent and in need of a guardian. All 50 states and the District of Columbia allow the court to appoint a guardian for an individual with limited mental capacity. Guardianship is a court appointment and requires periodic renewals.
A conservator or a guardian of the estate is an individual appointed by the court to make financial decisions on behalf of someone who is unable to manage his or her financial assets. Conservatorship will not become an issue for children with disabilities if their parents are planning for them through a special-needs trust.
Anyone older than the age of majority is considered legally competent unless a court of appropriate jurisdiction has determined otherwise. Often, individuals with disabilities are capable of holding jobs and caring for themselves to some degree. Most parents are sensitive about becoming guardians of an adult child, because it represents taking away all rights. Some parents opt for partial or limited guardianship for education, residential, or health-care decisions only.
Medical powers of attorney may also be considered as an alternative to guardianship for health where applicable.
The Achieving a Better Life Experience Act of 2014, better known as the ABLE Act, allows tax-advantaged savings accounts for individuals with disabilities and their families. The beneficiary of the account is the owner of the account and the income earned by the account is tax deferred, and the distribution from the account is income-tax free. Family, friends, as well as the individual with a disability, is allowed to fund the account not to exceed fifteen thousand dollars per year.
The amount may be adjusted periodically to account for inflation. Under current tax law, $15,000 is the maximum amount that individuals can make as a gift to someone else and not report the gift to the IRS (the gift-tax exclusion.) The total limit over time that could be made to an ABLE account will be subject to the individual state and their limit for education-related 529 savings accounts. Many states have set this limit at more than three hundred thousand dollars per plan. However, for individuals with disabilities who are recipients of SSI, the ABLE Act sets some further limitations.
The SSI benefits are suspended if the ABLE account exceeds $100,000 in value; benefits will be reinstated once the account falls below the threshold. While the beneficiary’s eligibility for the SSI cash benefit is suspended, there is no effect on the ability to receive or be eligible to receive medical assistance through Medicaid. Also, upon the death of the beneficiary, the state in which the beneficiary lived will have the first claim on the remaining assets in the account for an amount up to the amount spent since the time the individual ABLE account opened.
The ABLE account can be only used to pay for qualified expenses. These may include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management and administrative services, and other expenses that help improve health, independence, and/or quality of life.
A newer law, part of the major tax cut legislation of 2017, permits limited transfers from 529 college-savings accounts into ABLE accounts. The total amount that can be contributed to any beneficiary’s ABLE account in 2018 is $15,000. A 29% account transfer eats into that limit. Much larger annual contributions are permitted for 529 accounts, and they are not limited to individuals whose disability appears before age 26 (as is the case with ABLE accounts.)
ABLE accounts may not be considered as a planning tool for the long term for a person with a disability due to its limitation. Parents may still consider creating the special-needs trust but also research the benefits of an ABLE account if applicable.
Minoti Rajput, CFP, ChSNC, is the founder and principal wealth advisor of Secure Planning Strategies. She has been working with families with children of special needs for over 30 years and is a frequent speaker on various topics related to special needs planning. She is also the author of Beyond a Parent’s Love.
Rajput, Minoti H. CFP ChSNC. Planning for families of children with disabilities. Journal for Financial Planning, August 2001
Social Security Administration, www.ssa.gov, 2011
Suggested Reading on Special-Needs Planning
Nadworny John CFP and Cynthia Haddad, CFP, The Special Needs Planning Guide: How to Prepare for Every stage of Your Child’s Life, Paul H. Brooks, Publisher, 2007
Wright, Hal, The Complete Guide to Creating a Special Needs Life Plan, Jessica Kingsley Publishers, 2013.
Roscher, Webber Barton, Providing for Adult Children with Disabilities in a Traditional Estate Plan, Probate and Property Magazine, Volume 27, 2013.
Stevens, Bart, The ABC's of Special Needs Planning Made Easy, Stevens Groups LLC, November 1, 2002