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How Do I Align Retirement Planning with Planning for a Special Needs Child?

As parents of children with special needs age, they should revisit the decisions they made—sometimes many years ago—regarding guardianship, beneficiarie, and other aspects of their child’s care.

Neglecting to update an estate plan is always problematic. However, failing to update an estate plan when the family includes a special needs child can lead to disaster. An article from Barron’s titled “Retirement Planning? Don’t Forget to Review Plans for Special Needs Children” explains how this can be prevented before problems arise.

Decisions made in the past may no longer be appropriate, or even permitted. A grandparent may have been named as a guardian ten years ago and may have moved to another part of the country or died. A retirement plan based on selling the family home and downsizing to a small apartment may no longer be feasible. Healthcare insurance choices may be limited after retirement. In other words, life changes and estate plans need to change also.

Children with special needs who receive Supplemental Security Income (SSI) and Medicaid may not have more than $2,000 of assets in their name. If they are listed as beneficiaries on retirement plans or life insurance proceeds, they will become ineligible for these benefits. Money should never be left directly to a child with special needs, but it can be left through a Special Needs Trust. Parents may not realize how critical this is, or they may overlook changing beneficiary designations. Either way, the results can be financially devastating.

Talk with grandparents and any relatives who might want to leave something to a special needs child. Chances are they have no idea how an inheritance can impact a special needs family member.

Laws concerning funding a Special Needs Trust have changed. The ten-year rule on required distributions no longer applies to beneficiaries of qualifying Special Needs Trusts, so the SNT may be a beneficiary of a qualified retirement plan. A Roth IRA may be the best way to leave assets to an SNT, as there are no taxes due on withdrawals.

Life insurance is often used to care for a special needs family member. A second-to-die life insurance policy can be used to insure both parents and pay to the SNT on the death of the second parent, when the money is needed most. If one parent doesn’t qualify because of health issues, their underwriting may be balanced by the good health of another parent, which may keep premiums reasonable. Make sure the laws of your state and financial institution permit the proceeds to be directed to an SNT.

An ABLE account is a tax-advantaged savings plan for individuals with disabilities. The account can be opened for an individual at any age, as long as the disability onset occurred before age 26. Talk with an estate planning attorney to ensure the individual will qualify for this type of account. The 2021 annual contribution limit is $15,000. However, there are many exceptions, so don’t do this without professional help. For instance, SSI may be suspended, if the account balance rises about $100,000. Be sure the amount in the ABLE account won’t put means-tested programs at risk.

Reference: Barron’s (Oct. 23, 2021) “Retirement Planning? Don’t Forget to Review Plans for Special Needs Children”