Sep 12, 2022
4 financial steps to care for your child with special needs
Parents of children with special needs are busy folks, but they might sleep better at night if they made sure to take the time to complete four straightforward but important tasks that will help protect their children’s future.
"I have stayed awake worrying about our son’s future every night for the past 15 years. Who will care for him once we’re gone? If he’s not able to be financially independent, how much do we need to have saved for him?"
These are comments and questions from one of my clients during our first conversation about her son with special needs, and they are not unique to her. I hear these common themes from most parents I meet who have children with special needs.
The daily demands of doctor’s appointments, therapy sessions, school meetings to review their Individual Education Program, and the myriad other responsibilities consume a parent’s mental energy and focus. There’s not much time left each day to plan for the future. It can be overwhelming, to say the least.
But help is available. As a certified Chartered Special Needs Consultant®, I worked with this family for several months to chart a financial path. It addresses four fundamental steps to build a comprehensive financial plan for a child with special needs, and it can easily apply to other families as well.
Step 1: Have a current will and name a guardian for your child
Every parent needs to have a current will in place. Wills direct where assets should go after one’s death, but they are extra important for parents of minor and/or dependent children.
Your will names the person(s) you choose to be your child’s guardian if you pass away prematurely. For your child with special needs, it’s important to think about the amount of time your child may require a guardian, since it could extend into their adult life. For this reason, you should choose successor guardians who can step into that role after the primary guardian can no longer serve in that capacity.
One of my clients has named his mother as the guardian of his daughter, but given his mother’s advanced age, has also named two of his siblings as successors. These siblings can step in and provide care when needed.
You may wish to choose a different family member to serve in the role of trustee to oversee the financial aspects of your child’s life, as those two duties can be divided since they involve a different set of capabilities. Naming a guardian should be reviewed at least every five years, or more often as life events affect the guardian’s ability to take this responsibility. A legal document naming your child’s guardian should be the first priority in your financial planning journey.
Step 2: Create a special needs trust
Any assets left to your child with special needs should be placed in a special needs trust. These trusts serve a variety of purposes, including providing financial oversight that protects your child from those who may take advantage of them. The trusts may also prevent disqualification from certain public benefits, such as Medicaid and Supplemental Security Income.
When meeting with an estate planning attorney to draft your will, consider requesting that they draft language to leave any assets to your child in a special needs trust. This allows you to name a trustee to oversee management of any funds left to your child with special needs. It’s also important to communicate with other family members or close friends who may plan to leave money to your child in their wills. Doing so may help avoid potential disqualification from crucial public benefits by a sudden infusion of assets into your child’s estate. Without a special needs trust, having more than $2,000 in cash and/or investment assets may disqualify an individual from receiving certain public benefits.
Step 3: Acquire life insurance if needed
Once the special needs trust is created, it needs to be funded with enough assets to provide for your child for the rest of their life. If you don’t have enough savings and other assets, life insurance can be an excellent tool and is used by many parents to create instant liquidity if needed. A financial planner or life care planner can estimate the amount of money needed to care for your child over their lifetime. Then you can use that estimate to determine how much life insurance is needed.
For married couples, a survivorship policy is most commonly used to fund a special needs trust. This is because the policy’s death benefit does not pay out until the second spouse passes away, which is when the funds will be needed to provide for the child. Premiums for a survivorship policy may also be lower than an individual life insurance policy on each parent. The ownership and policy mechanics can be complex, so work with a knowledgeable financial adviser to guide the process of acquiring this coverage.
Step 4: Open and fund an ABLE account
If you currently have money set aside for your child, consider opening an ABLE (Achieving a Better Life Experience) account. This account can be set up online through a state-sponsored program and allows you to save and invest after-tax dollars. Any growth from these funds can be accessed tax-free to benefit your child with special needs. The list of qualified disability expenses is extensive, but be sure to follow your plan's guidelines on expenses to avoid paying taxes and a 10% penalty on the distributions.
Funding is capped at the annual gift tax exclusion ($16,000 for 2022) per beneficiary. If your child works, they may be able to contribute additional money to the account beyond the cap. However, as an ABLE account grows, if it’s valued at $100,000 or more, it can disqualify a person from receiving some Social Security Income benefits. For that reason, many families manage the distribution and addition of funds to this account to keep the balance below that threshold.
Once completing these four steps with the client I mentioned earlier, she let me know some of her most overwhelming worries had been addressed. Now she has a thoughtfully conceived, comprehensive plan for her son’s future. By taking these four steps, parents can be well on their way to providing a lifetime of financial support for their child. And it will also help provide some peace of mind knowing that some of the biggest planning objectives have been covered and the child’s financial needs will be addressed.
