While some parents stress over how to pay for their kids' college education, the parents of children with special needs face an even more daunting and difficult task: figuring out how to provide care and financial support for their child after their death.
This question can be complex. After all, we often can't predict how long we'll live or what someone's future medical needs might be. That's where some estate attorneys and financial planners can lend their expertise and offer assistance to families with special needs.
"It's hard enough to fund your own retirement, let alone a third person," says Mary Anne Ehlert, president and founder of Protected Tomorrows Inc., an organization that connects families of those with disabilities with financial, legal, residential, employment and recreation resources. "I call it retiring for three," Ehlert says.
Todd Sensing, founder and CEO of FamilyVest, a Florida-based fiduciary financial planning firm that advises families with special needs, recommends starting the planning process as early as possible. "That's with anything in finance, but especially [when] planning for a family with special needs," he says. "A lot of times parents are overwhelmed with therapies, the unknown and the emotional toil that can create," he adds.
Here's a look at the planning vehicles families use.
Letter of intent: Also called a letter of instruction, this document describes your child's situation and provides instructions for future caregivers. "It outlines, as a parent, what your vision of their life could be and various things that affect them, from the types of foods that they eat" to how you communicate, Sensing says. You can find examples online and create this document for free, but it's not a legal document.
If you're working with an estate attorney, Sensing also suggests having him draft a letter to other relatives or family friends and asking them not to directly bequeath funds to someone who receives benefits such as Medicaid or Supplemental Security Income, a federal program that helps elderly people or those with disabilities who have little or no income. That's because they would lose eligibility if they have more than $2,000 to their name (a problem that two strategies listed below avoid). "You never know when someone might leave something in a will," Sensing says. "It's nice to let everybody know [the issues around direct bequests], so there's no aunt who gives $5,000 upon her death," he adds.
ABLE Account: ABLE Accounts are designed for people with the onset of a disability before age 26. They're modeled after 529 college savings plans in that money can be set aside for future needs and grow tax-free. The money set aside in these accounts can also be spent tax-free on qualified disability expenses such as medical treatment, housing, education and legal fees.
"One thing that the ABLE Account can provide is a bit of flexibility if you have an individual who is able to work," says Michael Kerns, vice president and trust officer at Univest Bank and Trust Co. in Souderton, Pennsylvania. "[Americans with disabilities] can make those contributions themselves. [They] do not have to rely on the trustee to make those distributions for them." ABLE Accounts are also not subject to the $2,000 limit that would disqualify eligibility for government benefits such as Supplemental Security Income or Medicaid, but they do have a maximum annual total contribution of $14,000.
Special Needs Trust: Public benefits such as Medicaid and Supplemental Security Income do not cover all of a person's needs, so these trusts ensure that money is available for additional expenses without jeopardizing eligibility for benefits. Also called a supplemental needs trust, a special needs trust does not carry the same limitations as an ABLE Account.
There are two types of special needs trust options: first-party trusts and third-party trusts. While first-party trusts are funded by money the individual received as an inheritance, a personal injury award or some other source, third-party trusts are funded by the individual's family member or life insurance policies from relatives. When the beneficiary of a first-party trust dies, the state can seek Medicaid reimbursement from funds remaining in the trust. However, third-party trusts do not require reimbursement.
Families can self-fund a third-party trust, but those that don't have excess cash can fund the trust with second-to-die insurance (also called dual-life insurance) instead. Unlike a traditional life insurance policy, where beneficiaries receive benefits after the insured person dies, the policy pays out only after the second person, typically a parent, dies. Using a second-to-die insurance policy that pays out in a lump sum, allows Sensing and his clients to forecast the amount of money the trust will get from the insurer.
Beyond figuring out how to fund the trust, families or individuals also need to decide whom to appoint as trustee. "Some people choose a family member. Some people choose a corporate fiduciary," Kerns explains.
To understand the financial picture of a person with special needs, Kerns says he asks questions including, "What situation are they in? What is their family situation? What type of support system do they have around them? Are they able to work?" The individual's current situation and support system is also likely to change over time, so the plan may need to be revisited later on.
While these considerations may sound overwhelming, working with a team of experts such as doctors, social workers, financial planners and estate attorneys can help you plan for the future. "Surround yourself with all these people," Ehlert says. "They all need to work together as a team," she adds.
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