Balancing Retirement with Special Needs Planning

August 3, 2020

Balancing retirement with special needs planning can be difficult for a family with a special needs child. Many government benefits are “means tested,” which can put financial restrictions on how much money the individual can have in their name. Careful estate and financial planning is important, advises the article “How Having A Child With Special Needs Impacts Your Retirement Planning” from Forbes.

In most instances, providing financially for children ends a year or two after college. However, for the family with a special needs family member, the financial assistance does not end. It’s also likely that the child will live with their parents well into the parent’s retirement. The family will need more money during retirement to provide for their child’s needs, including therapies, transportation and hobbies.

The family may choose to have the child live in a group home setting, but those costs are substantially higher, depending on the home and the level of care required.

Parents are often more focused on planning to care for their disabled family member and overlook their own retirement planning. It is important to find the balance between both.

Social Security planning is a bigger factor for the family with a special needs family member. If parents decide to collect their Social Security benefits, they need to map out what different scenarios could mean, including delaying when to take benefits and spend down assets.

If the disability of a child with special needs began before age 22, the child may be eligible for Social Security Disability Insurance, generally half of the last surviving parent’s Social Security payment in retirement (in addition to what the parent receives). When that parent dies, the amount increases to three-quarters of the parent’s benefits. This must be calculated in terms of income now for the child while the parents are living and after the parents pass.

It’s critical for the parents of an individual with special needs to do a careful budget analysis of their own retirement income and what they will need to care for their child. Once they understand these numbers, they can figure out what assets and income streams will make the most sense. A professional financial advisor can be very helpful for this process.

The family may need to set up a special needs trust (SNT), which is best done with an experienced estate planning elder law attorney. Life insurance may be purchased to fund a child’s lifetime needs and be placed in the SNT.

The family will also need to address tax planning. Traditional 401(k) plans and IRA accounts are not taxed until withdrawals are taken. There have been a number of changes to the law in recent months, not the least of which is the CARES Act, which allows withdrawals to be made from retirement accounts with no extra penalties. For additional information, please read our previous post on special needs planning.

Reference: Forbes (July 1, 2020) “How Having A Child With Special Needs Impacts Your Retirement Planning”

Your Estate Plan Needs to Be Customized

July 23, 2020

The only thing worse than having no estate plan, is an estate plan created from a ‘fill-in-the-blank’ form, according to the recent article “Don’t settle for a generic estate plan” from The News-Enterprise. Your estate plan needs to be customized. Compare having an estate plan created to buying a home. Before you start packing, you think about the kind of house you want and how much you can spend. You also talk with real estate agents and mortgage brokers to get ready.

Even when you find a house you love, you don’t write a check right away. You hire an engineer to inspect the property. You might even bring in contractors for repair estimates. At some point, you contact an insurance agent to learn how much it will cost to protect the house. You rely on professionals, because buying a home is an expensive proposition and you want to be sure it will suit your needs and be a sound investment.

The same process goes for your estate plan. You need the advice of a skilled professional–the estate planning lawyer. Sometimes you want input from trusted family members or friends. There other times when you need the estate planning lawyer to help you get past the emotions that can tangle up an estate plan and anticipate any family dynamics that could become a problem in the future.

An estate planning attorney will also help you to avoid problems you may not anticipate. If the family includes a special needs individual, leaving money to that person could result in their losing government benefits. Giving property to an adult child to try to avoid nursing home costs could backfire, making you ineligible for Medicaid coverage and cause your offspring to have an unexpected tax bill.

Your estate planning lawyer should work with your team of professional advisors, including your financial advisor, accountant and, if you own a business, your business advisor. Think of it this way—you wouldn’t ask your real estate agent to do a termite inspection or repair a faulty chimney. Your estate plan needs to be created and updated by a skilled professional: the estate planning lawyer.

Once your estate plan is completed, it’s not done yet. Make sure that the people who need to have original documents—like a power of attorney—have original documents or tell them where they can be found when needed. Keep in mind that many financial institutions will only accept their own power of attorney forms, so you may need to include those in your estate plan.

Medical documents, like advance directives and healthcare powers of attorney, should be given to the people you selected to make decisions on your behalf. Make a list of the documents in your estate plan and where they can be found.

Preparing an estate plan is not just signing a series of fill-in-the-blank forms. Your estate plan needs to be customized. It is a means of protecting and passing down the estate that you have devoted a lifetime to creating, no matter its size.

Reference: The News-Enterprise (June 23, 2020) “Don’t settle for a generic estate plan”

Needs Testing for Special Needs Planning

July 20, 2020

Public benefits for disabled individuals include health care, supplemental income, and resources, like day programs and other vital services. Some benefits are based on the individual’s disability status, but others are based on needs testing, where eligibility is determined based on financial resources, as explained in the article “Planning for loved ones with special needs” from NWTimes.com.

Needs testing is something that parents must address as part of special needs planning, in concert with their own estate planning. This ensures that the individual’s government benefits will continue, while their family has the comfort of knowing that after the parents die, their child may have access to resources to cover additional costs and maintain a quality of life they may not otherwise have.

Families must be very careful to make informed planning decisions, otherwise their loved ones may lose the benefits they rely upon.

A variety of special planning tools may be used, and the importance of skilled help from an elder law estate planning attorney cannot be overstated.

One family received a “re-determination” letter from the Social Security Administration. This is the process whereby the SSA scrutinizes a person’s eligibility for benefits, based on their possible access to other non-governmental resources. Once the process begins, the potential exists for a disabled person to lose benefits or be required to pay back benefits if they were deemed to have wrongfully received them.

In this case, a woman who lived in California, engaged in a periodic phone call with California Medicaid. California is known for aggressively pursuing on-going benefits eligibility. The woman mentioned a trust that had been created as a result of estate planning done by her late father. The brief mention was enough to spark an in-depth review of planning. The SSA requested no less than 15 different items, including estate documents, account history and a review of all disbursements for the last two years.

The process has created a tremendous amount of stress for the woman and for her family. The re-determination will also create expenses, as the attorney who drafted the original trust in Indiana, where the father lived, will need to work with a special needs attorney in California, who is knowledgeable about the process in the state.

Similar to estate planning, the special needs planning process required by Medicaid and the SSA is a constantly evolving process, and not a “one-and-done” transaction. Special needs and estate planning documents created as recently as three or four years ago should be reviewed.

Reference: NWTimes.com (June 21, 2020) “Planning for loved ones with special needs”

Funding a Special Needs Trust

May 29, 2020

Funding a Special Needs Trust is just the start of the planning process for families with a family member who has special needs. Strategically planning how to fund the trust, so the parents and child’s needs are met, is as important as the creation of the SNT, says the article “Funding Strategies for Special Needs Trusts” from Advisor Perspectives. Parents need to be mindful of the stability and security of their own financial planning, which is usually challenging.

Parents should keep careful records of their expenses for their child now and project those expenses into the future. Consider what expenses may not be covered by government programs. You should also evaluate the child’s overall health, medical conditions that may require special treatment and the possibility that government resources may not be available. This will provide a clear picture of the child’s needs and how much money will be needed for the SNT.

Ultimately, how much money can be put into the SNT, depends upon the parent’s ability to fund it.

In some cases, it may not be realistic to count on a remaining portion of the parent’s estate to fund the SNT. The parents may need the funds for their own retirement or long-term care. It is possible to fund the trust during the parent’s lifetime, but many SNTs are funded after the parents pass away. Most families care for their child with special needs while they are living. The trust is for when they are gone.

The asset mix to fund the SNT for most families is a combination of retirement assets, non-retirement assets and the family home. The parents need to understand the tax implications of the assets at the time of distribution. An estate planning attorney with experience in SNTs can help with this. The SECURE Act tax law changes no longer allow inherited IRAs to be stretched based on the child’s life expectancy, but a person with a disability may be able to stretch an inherited retirement asset.

Whole or permanent life insurance that insures the parents, allows the creation of an asset on a leveraged basis that provides tax-free death proceeds.

Since the person with a disability will typically have their assets in an SNT, a trust with the correct language—“see-through”—will be able to stretch the assets, which may be more tax efficient, depending on the individual’s income needs.

Revocable SNTs become irrevocable upon the death of both parents. Irrevocable trusts are tax-paying entities and are taxed at a higher rate. Investing assets must be managed very carefully in an irrevocable trust to achieve the maximum tax efficiency.

It takes a village to plan for the secure future of a person with a disability. An experienced elder law attorney will work closely with the parents, their financial advisor and their accountant.

If you would like to learn more about special needs trusts, please visit our previous posts.

Reference: Advisor Perspectives (April 29, 2020) “Funding Strategies for Special Needs Trusts”

How ABLE Accounts Work

March 18, 2020

It took nearly a decade of lobbying, but in 2014, Congress passed the Achieving a Better Life Experience Act. The law, referred to as ABLE, lets people with disabilities open a tax-advantaged account, similar in many ways to 529 accounts used to help with college funding. How ABLE accounts work is explained in the article “Everything You Need to Know About ABLE Accounts” from U.S. News & World Report.

The accounts allow eligible individuals to save money without putting their eligibility for government benefits at risk. The income from the account is not used for means testing for Social Security Income or Medicaid.

However, despite these benefits, ABLE accounts are still not widely used. Less than 57,000 accounts have been opened nationwide. Here’s more information on how they work.

Why would a disabled person want an ABLE account? Living with any type of disability is costly. There are out-of-pocket expenses for transportation, housing, and education that may not be covered by government programs. Those programs limit a person’s assets to $2,000. Prior to the ABLE Act becoming law, that meant that a disabled person could not save money for their own use. While there are limits to the size of ABLE accounts, they provide an opportunity for a financial cushion.

Who is eligible for an ABLE account? A person who became blind or disabled before age 26 may be the beneficiary of an ABLE account. Someone who is receiving SSI or Social Security Disability benefits is automatically eligible to open an account. Others will need to meet Social Security’s definition of being disabled and have a doctor’s letter stating that they are disabled to qualify.

Do all states offer ABLE accounts? There are 42 states, plus the District of Columbia, that offer ABLE Accounts. But a disabled resident of a state that does not offer ABLE accounts can open one with another state’s program. Right now there are 26 states that let anyone open an account, and the rest limit their programs to state residents. An estate planning attorney will know what your state’s rules are.

Are there tax incentives for using an ABLE account? This varies by state. Michigan and Arkansas let single filers deduct $5,000 in contributions to an ABLE account on their state tax forms. For joint filers in these two states, the maximum deduction is $10,000. In Illinois, there is a state income tax deduction of $10,000 for a single filer and $20,000 for joint filers. For Kansas, deductions are smaller; $3,000 for individuals and $6,000 for couples. New York State and California do not allow any deductions.

How much can be contributed to an ABLE account? $15,000 a year is the limit for annual contributions. Be aware that the first $100,000 of an account’s balance is shielded from asset means testing for government programs. Once the account reaches $100,001, it could impact SSI benefits.

What expenses can the ABLE account be used for? The account is designed to be used by people with disabilities, so things like medical treatment, transportation, education, and assistive technology are permitted uses. The expense must be related to a person’s disability.

Does it cost anything to open an ABLE account? This varies by state. In Ohio, you’ll pay $30 to open an account if you are a resident; out of state fees are $42 annually. In New York, only residents can open accounts, and the fee is $45 to open an account online and $55 if it is done on paper by mail.

Should a Special Needs Trust be used instead of an ABLE account? Many families chose a Special Needs Trust instead of an ABLE account. These trusts cost more to setup, but also offer more flexibility. They once were the only option. An estate planning elder law attorney will be able to explain how ABLE accounts and SNTs work, and guide the family as to which is the best solution for their disabled family member.

If you would like to learn more about special needs planning, please visit our previous posts.

Reference: U.S. News & World Report (February 18, 2020) “Everything You Need to Know About ABLE Accounts”

Category: Special Needs

Your Estate Plan Needs to Be Customized

Funding a Special Needs Trust

Categories

View Blog Archives

Watch the

Estate Of The Union

Join Our

eNewsletter and Blog Digest List

Listen to the

Estate Of The Union

Texas Trust Law

Quick Links

Connect With Us