“These parents are spending $30,000 to $60,000 a year, and a lot of that is out of pocket,” Friese says. “You’re not only planning for the special needs child’s care, you’re trying to make sure the parents are OK.”
Planners have dubbed the issue “retirement for three” as parents never experience an “empty nest.” Around 25% of family caregivers are over 60, according to research by the University of Illinois, and the average age of a person being cared for at home is 38. More than half of special needs children outlive both parents.
Cost-cutting strategies such as downsizing homes or moving to lower-cost areas become impossible if medical and occupational resources for the disabled person aren’t available.
For many families, saving is difficult, Flaum says.
“We talk about what Medicare will look like and if they need care in a nursing home,” Flaum says. “Parents are going to do anything for their kids; that includes not planning for retirement. If I give them a choice to put more away for their child, if they are willing to go on Medicaid or enter a nursing home, most people will choose Medicaid or the nursing home and support their kids. That’s still a form of retirement planning.”
While most families plan to take care of their children only through the end of college, special needs families plan for a lifetime. “My plans are targeted towards making sure families have funds to take care of their individual with special needs,” Tanham Carney says. “Families ask what they should do first, and I refer them to a special needs attorney. I always say do your estate planning first, then focus on the financial life plan.”
A standard estate planning strategy can put special needs children at risk for losing benefits, says Flaum, so parents need a will that designates a special needs trust as a beneficiary. “This is a serious issue for young parents who haven’t faced their own mortality,” Flaum says. “They’re going to have someone who will be dependent on their decisions long after they’re gone. It’s critical to put the pieces in place so it can be an organic process.”
The only way to ensure the appropriate use of assets for a disabled family member is by putting them in special needs trusts, complex savings vehicles used by families in which savings, gifts and legal settlements for the child should be located.
If the trust’s funds are used for qualified expenses such as medical equipment, transportation, home health aides, education, rehabilitation, computer equipment and medical care not covered by Medicaid, they don’t count against benefit eligibility.
“These should be set up right away, even if the child is very young,” Friese says. “You never know when parents or grandparents are going to start contributing, and it’s not expensive to do.”
For most families, special needs trusts take effect when life insurance pays out. “I find that these families do not have sufficient assets to fund a retirement along with the child’s future,” Johnston says. “Life insurance can help fund the trust at the appropriate time. A survivorship universal life insurance policy works well because the trust needs to receive the financial assets at the passing of the second parent.”
If the client can afford it, permanent life insurance is preferred, says Friese. “A lot of people make mistakes in this area. It has to be permanent. Term insurance doesn’t work.”
But whole and variable universal life insurance may be prohibitively expensive for special needs families. That’s why Johnston recommends survivorship or “second-to-die” policies. The premiums are lower, and the trusts receive money when the beneficiary needs it.
“It assumes the child will be OK as long as one parent is living,” Friese says. “Either way, the beneficiary of the policy needs to be a special needs trust.”
Special needs trusts may be too costly and time-consuming to arrange for financially stressed families. That’s one of the reasons Congress created a new savings vehicle, the “529A” account, with the passage of the ABLE act in December 2014.
“The ABLE Act is going to let them save up to $14,000 a year,” Friese says. “It is structured similarly to a 529, and it can be used by the special needs child or adult for purposes of their own.”
Like their educational cousins, ABLE Act 529A plans allow tax-advantaged growth and savings. Now families can take a three-bucket approach to special needs planning: Social Security, ABLE Act accounts and special needs trusts.
“Social Security is immediate and it has to be spent down,” Friese says. “ABLE accounts empower the person with special needs to work, put aside money for savings or an emergency fund or to fund purchases like cars or homes. Special needs trusts are savings for the long term.”
Though there are more planners today than there were almost 20 years ago, few have special needs planning experience, so they should collaborate with specialists when possible, Friese says. “Families and advisors should be encouraged to reach out to a specialist,” Friese says. “I have people call me every day for my expertise, and I would lean on someone who has special needs experience if I didn’t have it myself.”
Some insurance companies train agents to serve these families, but these agents don’t necessarily serve the clients’ best interest. “When I first came across the special needs community, I found that most advisors were salespeople with products from the insurance industry,” Walther says. “We found that people wanted objective information. We were able to produce great client relationships by offering other options.”
Special needs planners don’t need affinity with their clients, but they should be willing to serve extraordinary clients with unique concerns. “Don’t dabble in this area,” Haddad says. “You can ruin a person’s life, you can ruin a family’s life. Improper planning can mess up their support system. You need to have more empathy and compassion, and keep a box of tissues handy.”
So special needs planning calls for a special kind of advisor, says Flaum. “At every level of advising we have to understand that we’re liable for a long time, maybe generations,” Flaum says. “It’s serious stuff, especially with special needs. If you plan appropriately, everything you plan today should be passed on and managed tomorrow. Today’s decisions have growing repercussions as time passes.”