For most retirees, the basics of family planning are simple enough, says Stewart Richardson, a financial planner who practices out of Owings Mills, Maryland. Start by having the clients fill out powers of attorney. Then make sure they have a valid and up-to-date will.
It gets more involved, he says, when clients have a family member who may not be in a position to take charge of their own affairs; an aging parent, for instance, or a child with special needs. While both situations pose challenges, planning for the needs of a disabled child who may live another 50 years or longer is especially difficult.
In such cases, advisors need to ascertain what kind of life the clients envision for their child and whether the child is capable of working or living independently. Another delicate, but critical, question is if the child is likely to have a shortened life span. The answers will determine the type of plan that needs to be put in place, says Mary Anne Ehlert, president of Protected Tomorrows, an advisor network in Lincolnshire, Ill., that helps families caring for disabled members.
One critical consideration is how to ensure that the child remains eligible for government programs and benefits, including Medicaid and Social Security's Supplemental Security Income program. A disabled person with more than $2,000 in assets, subject to a five-year look-back period, will be barred from these programs. This makes it imperative that the advisor ensure that there are no assets in the child’s name that would disqualify him, according to Joanne Gruszkos, director of the Special Care Program at Mass Mutual Life Insurance in Springfield, Mass.
"A planner will want to make sure [children are] not listed as beneficiaries on trusts, wills, group health plans, 529 accounts - all of that would be considered disqualifying," Gruszkos says. The same holds true for 401(k)s or pensions.
A frequently used approach is to set up a third-party, special-needs trust. Assets in these trusts aren't counted toward the disabled person's eligibility cap for Medicaid benefits, but there are rules about how the money can be used, says Dennis Sandoval, an estate planning attorney in Riverside, Calif., who works with the Special Needs Alliance, an advocacy group.
Unearned income set aside for food and shelter expenses -- called in-kind support and maintenance -- can reduce SSI benefits by as much as $250 a month. "For many people, Medicaid is tied to SSI, which would mean they'd also lose their health insurance," Sandoval adds. "The trustee has to be aware of these rules."
These trusts can be funded with the proceeds from a second-to-die life insurance policy. "Second-to-die doesn't pay out until the second death, so the premiums are less," Ehlert says. "We make the assumption that as long as one parent is alive and well, they'll take care of the supplemental needs. But the minute you're both gone, you need this pot of money."