Special needs families are accustomed to things being more complicated, and retirement planning is no exception. Parents must plan for their own retirement as well as ensure a plan is in place for the time when they are no longer able to care for their special needs child. That includes everything from making sure beneficiary designations are up-to-date, to ensuring a child’s inheritance does not make them ineligible for means-tested government benefits.
With the increase in life expectancy for disabled adults, retirement planning for parents has become more complex. A recent MarketWatch article, “Parents of Special Needs Children Plan for Two Futures” says that special needs parents are really planning for two lifetimes, one extending beyond the other. The National Down Syndrome Society reports that today, people with Down syndrome have a life expectancy of 60, compared to just 25 in 1983. In 2030, they project there will be approximately 1.2 million developmentally disabled adults age 60 and older in the U.S. This number is about twice the number in 2000, which was about 642,000, according to 2012 research by the University of Illinois at Chicago.
It’s critical that parents of special needs adults make certain that any savings and investments won’t disqualify their child from means-tested government benefits, which can impact the parents’ ability to save for retirement. To avoid this, parents should ask an elder law or estate planning attorney to help them create a special needs trust. The assets held in the trust for the disabled person’s benefit won’t affect his or her eligibility for government benefits.
Parents with a special needs trust for their child should make sure they name the trust, not the child, as a direct beneficiary of any asset. Parents can use their 401(k) or IRA funds as needed during retirement and any remaining funds will flow to their beneficiary only at their death. Additionally, beneficiaries can be changed at any time, but should be regularly reviewed.
You’ll also want to ensure your financial institutions have correctly named the trust the beneficiary. With certain financial institutions, extra roadblocks can be thrown up for trusts. You’ll want to verify with your institutions that they have the correct beneficiaries on file.
Another option is a 529 ABLE account. This type of account can hold up to $100,000 in assets without jeopardizing a special needs adult’s eligibility for means-tested government benefits and the special needs individual is the owner of the account. Families are able to contribute up to the maximum gift exclusion each year ($14,000 as of 2017). The 529 ABLE account is a great complement to a special-needs trust.
At some point, parents themselves will need care, not just their child. Diminished capacity in aging parents can mean a need for outside help, which can be very costly. Parents should consider getting long-term care insurance coverage at age 50. That’s when they’re typically healthy enough to pass medical underwriting, but may no longer have large expenses like a home mortgage or college tuition for other children.
While it can be expensive, long-term care policyholders may be eligible for certain tax breaks. The IRS stipulates that qualified long-term care insurance premiums are an expense that can be funded through health savings accounts up to specific limits. Plus, long-term care expenses themselves can be paid out of an HSA, provided they meet certain criteria. HSAs offer other tax advantages, too. The money isn’t taxed when deposited, but appreciates on a tax-deferred basis. It can also be withdrawn tax-free to pay for qualifying medical expenses now or in retirement.
One word of caution: if HSA funds are used for the purchase of durable medical equipment for a special needs child, it could mean that the equipment will be considered an asset that belongs to the child. This could potentially hinder eligibility for means-tested government benefits. Be careful when using HSA funds to pay for a dependent child’s medical needs.
While navigating the intricacies of “planning for two lifetimes”, seek an experienced special needs and estate planning attorney. At Family Estate Planning Law Group, we are able to guide you through the myriad decisions to determine how best to protect your child and your family. For more information, explore our website and contact us to schedule your consultation today!
Reference: MarketWatch (July 7, 2016) “Parents of special needs children plan for two futures”