Financial Planning for Families with Love Ones with Special Needs

Pat Bergmaier

By Pat Bergmaier | May 8, 2018

Over 90 percent of my practice as a financial planner is working with parents of children with special needs. This can be challenging because “special needs” means special on every level. There is no cookie-cutter solution that can guide people in the journey.

In the past almost ten years of working with these families, I’ve learned that there are three components to creating a comprehensive financial plan when a disability is present:

  • Legal. Working with a lawyer whose expertise is in special needs estate planning is essential. This individual will draft the legal documents that protect the child’s eligibility for government benefits while safeguarding assets that will provide quality of life and lifetime care. This is usually handled through a special needs trust.
  • Income planning. Families with children who have special needs need to plan for two lifetimes of income. I call it a “three-person retirement” – income for both mom & dad’s lifetimes but also continuing for the lifetime of the disabled adult child.
  • Care management. Once the legal documents are in place and there is a funding strategy for the special needs trust, it’s time to choose who will take care of your child when you’re gone. Aside from other living family members, you can also look to work with organizations that can provide care management. A document called a Memorandum of Intent can help outline parents’ wishes for ongoing care as well as provide information that caregivers might need to know about their son or daughter.

What are some of the common mistakes I see people making in their planning?

  • Keeping too many assets in the child’s name. Parents often assume that certain educational and support services will always be available for their children with special needs, but those services often end once the child reaches 18, or perhaps 21. After that, there is usually a stringent financial needs test for certain services provided by a government agency. For SSI and Medicaid, for example, the child cannot have more than $2,000 in assets in their name. This is why it’s important to work with a lawyer to set up a special needs trust.
  • Not funding the special needs trust. It’s not enough just to do the legal paperwork. You need to do the groundwork to fund the plan as well. Special needs trusts can be funded in a variety of ways, and almost any asset can go into a trust. However, it can be tricky to use tax-deferred money from something like a 401(k) plan.
  • Not investing in a manner that supports two lifetimes of need. Parents can’t invest with a risk tolerance based solely on their life expectancy, because there’s another lifetime beyond theirs that needs to be accounted for. When to elect Social Security benefits is another area that requires careful planning. Having a parent start benefits at 62 may permanently reduce the lifetime disability benefits available to the child with special needs.
  • Relying on term life insurance, or not getting long-term care or disability insurance. The need for life insurance will always remain, no matter how old the parents are. It’s important to choose a permanent life insurance policy over term insurance in special needs planning. A permanent policy can be a way to set aside money to fund a trust. Long-term care and disability insurance can also play a key role in financial planning for families who have a child with special needs. These vehicles have the ability to protect the parents’ lifestyles while also protecting funds set aside for the adult child.

Financial planning for families with special needs requires looking at everything from a very different vantage point. If done right, though, it can make a real difference in your loved one’s quality of life and lifetime care in the future.

This information is for educational purposes only. Neither Penn Mutual nor any of its employees, agents, or representatives provide tax or legal advice.

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