Estate Planning

Does Your Plan Have a Special Needs Clause?

When creating your estate plan, it’s important to consider not only today’s circumstances, but also to plan for the uncertainty of tomorrow. This is why everyone should have a special needs clause in their estate documents.

Your children might not have a disability today, but what about tomorrow? What about future children and grandchildren? If you have your brother or sister as contingent beneficiaries in your will or your life insurance, what about their children and grandchildren? Keep in mind that nearly one-fifth of all Americans* — more than 56 million people — have a disability, and close to 30% of all families have a family member with a disability.

A cautionary tale

As an example of how improper planning can impact a family with a loved one with special needs, a financial professional recently shared this story with me.

A grandfather, thinking he was doing the right thing, left his fully paid-for home and a sizable amount of cash to his granddaughter, who has special needs. He clearly thought this was a perfect set up. His granddaughter had visited his house every Sunday her entire life, so she was comfortable with it. She would have a house to live in and the money to continue to maintain that house for many years to come.

Unfortunately, because the inheritance was in her name, she was now no longer eligible for government benefits. Suddenly, the doctors she went to weren’t her doctors any more. The programs and other activities she participated in were no longer available to her. The inheritance ended up being a devastating blow, emotionally and financially. A special needs trust would have helped avoid this.**

Planning tips for parents of children with special needs

Everyone should have contingency clauses in their estate plans, but for parents with a child who has special needs, it is vitally important to plan for the long term. What will happen as you grow older and you’re no longer there to support your child’s financial, physical and emotional needs?

The typical family plans financially for four years of college and then their financial obligation is complete —the child is emancipated and no longer the parents’ financial responsibility. When you have a loved one with special needs, you’re planning for a lifetime of care. It’s often said that parents with a child with special needs need to plan for a 3-person, 2-generation retirement: Their own, and the lifetime of care their child needs.

Special needs planning can be complex. Government benefits are available for those who have a disability, but the benefits are needs-based and there are strict limits for the amount of income and assets a person can have in their name. Anything more than $2,000 in assets may trigger ineligibility.

Therefore, a good special needs plan is a delicate balance of financial, legal, governmental, and medical strategies. It is best assembled by an integrated team of professionals — an attorney, a CPA, a financial professional — with specific expertise in special needs planning.

In particular, families with a child with special needs should have the following in place:

A solid estate plan. This should be drawn up with the help of a lawyer with expertise in special needs trusts. The consequences of getting something wrong are serious. It is important you consider the best way to leave assets to the child.

A good special needs trust. A special needs trust should be designed to supplement, not supplant, government benefits and provide for overall quality of life.

Insurance protection and risk management. Permanent life insurance is almost a must, because the responsibility for your child with special needs will never end. The death benefit of a permanent life insurance policy can provide the funding for the special needs trust.

A letter of intent. This includes information about the child’s requirements and preferences. What doctors and medications are involved? What is your child’s diet? What are their personal habits? What are their favorite items and hobbies? What is their daily routine? Imagine all the things you would tell a caretaker about your child, if you were going to be away.

A team of the right professionals. I’ve said this before but it bears repeating: You should be working with people who have expertise in special needs planning.

Mistakes people make in planning for special needs

While special needs planning is an area where mistakes can be costly, I think the biggest misstep people make is simply failing to plan in the first place. In particular:

Procrastination. Once the family has come to terms with their child’s diagnosis, it is important to take action and to start thinking long term. Things can always be tweaked later if needs change, but the consequences of not having the right tools in place can be devastating.

Lack of Coordination. The attorney, the financial professional, and family members should each be aware of the full plan. Care givers should also be made aware of the special needs plan. Remember the grandfather who left his home to his granddaughter.

Not working with an expert. It is very important that families work with an attorney who specializes in special needs planning. It is tricky, complex work, and it is easy to get it wrong.

Outdated Plan. The plan you had in place for your 3-year-old may no longer be appropriate for your 10-year-old — or your 16-year-old. Everyone should review their will, trust, healthcare proxy and durable powers of attorney every two to three years. This is really important for families with a loved one with special needs. Parents should carefully review their overall estate plan, paying particular attention to choice of guardians, caretakers, and trustees. Any change in the child’s situation and need should trigger a review.

Planning for special needs is an important and often overlooked issue. Many remain unaware of how the simplest of mistakes can negatively impact those with special needs. Penn Mutual understands the needs of this market and remains committed to training its financial professionals to help families facing these challenges.

*Nearly 1 in 5 People Have a Disability in the U.S., Census Bureau Reports. (2012, July 25). Retrieved from

**This information is for educational purposes only and should not be considered specific tax, legal, investment or planning advice, which will only be provided on a personalized basis. The client story is true and names were removed for privacy purposes. Depending on individual circumstances, the strategies discussed may not be appropriate for your situation. Individual results may vary and the presented information is not a guarantee of future performance or success.

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