The Financial Building Blocks for Special Needs Family Planning

Zev Grossman

By Zev Grossman, Financial Consultant & Retirement Planning Specialist at Equitable Advisors

When my daughter was five, someone gave her a puzzle game made from building blocks. The idea behind the game was to organize the pile of blocks to match a pattern on playing cards that came with the game. It was a fun game to play, but it was also a very important life lesson. Success is about creating order out of chaos.

As a financial professional, my daily mission is to help my clients bring structure and order to the confusion of their financial lives. Nowhere have I found this mission to be more needed or more valued than when working with families that have members with special needs. In addition to the traditional financial issues of planning for higher education, retirement, insurance, savings, aging, etc., the special needs family faces a long list of additional concerns. These include maximizing government programs, guardianship, supplemental needs planning, healthcare, and independent living to name just a few.

Lest you think that working with families with special needs is a niche activity, you should be aware that various studies have estimated that about 20% of the population has some sort of disability. So, if I don’t ask about this issue in every discovery meeting with a new client, I am doing them a major disservice. And I certainly am not meeting my responsibility to know my clients.

Many clients are self-conscious about discussing such issues openly and I myself am often reluctant to probe. So, I have found a simple way to broach this topic that prevents it from getting too awkward. I simply ask, “Is there anyone in your family that will not be able to be financially independent in the future or make responsible financial decisions for themselves?” Regardless of the reason, or the diagnosis, or the details, if the answer to this question is “yes”, I need to do additional, special needs planning.

To try to bring some order to the chaos of the planning process for special needs families, I follow a specific six-step procedure:

Step 1 – Create a Written Financial Plan

The idea behind the financial planning process is to lay out all your important financial issues side by side. This lets you organize each challenge in order of priority and then assign resources (i.e., money) to them. For example, if education is more important than the size of the house you live in, then you should address education savings first and adjust your housing expense after.

Without a plan, most people tend to spend linearly. We buy a car, then a home, then start a family, then plan for things like insurance and education savings. Often, we find ourselves short of funds partway through the process. This is one reason why many kids grow up in fine houses with nice cars in the driveway but end up with crushing student loans.

For balancing a few issues, people can do the planning in their heads or on a yellow pad. But when there are several important and expensive priorities, it becomes necessary to use a more structured approach. Hence, the “written financial plan”.  It can be very challenging to estimate the future cost of expenses for a family member with special needs. The scope of the need, the impact of inflation, the government contribution to services and support, even the path of the disability can be elusive. But as the great general and architect of D-Day, Dwight Eisenhower was known to say, “Plans are worthless, but planning is essential.”

Step 2 – Prepare a Will and Other Estate Documents

If you die without a will (intestate), the law has certain provisions for distributing your assets and taking care of your children. The outcome of this might be deeply unsatisfying, but for a special needs family, this approach can be calamitous.

The distribution of assets to a disabled individual, even an amount as small as $2,000, can disqualify them from receiving needs-based government aid such as supplemental security income (SSI). Modest amounts of assets can preclude them from receiving needed Medicaid benefits and access to supplemental care and community services, many of which are administered through Medicaid.

If you don’t select a guardian for your dependents, the court will. It seems unimaginable to let a stranger choose who will raise your kids, care for them, educate them, and teach them their moral and religious ethics. Imagine that process if one or more of the children are disabled. How can you not have a will?

Step 3 – Choose Your Fiduciaries Wisely

It takes a village to raise a child, but only three key players to close an estate. They are the Executor, the Trustee, and the Guardian.

  • The Executor: It is the responsibility of the Executor to making sure your will is executed according to your wishes. They oversee the distribution of your assets, arrange for payment of your outstanding bills, and file your final taxes.

  • The Trustee: If any of your assets are directed to a trust, e.g. a special needs trust (see step 4); the trustee is the gatekeeper of that trust. They oversee the investment of the assets and the appropriate distribution of the trust’s money to the designated beneficiaries.

  • The Guardian: If you have minor or disabled dependents, someone must take on your responsibilities if you can’t be there. The guardian takes on the role of surrogate parent.

The role of a fiduciary comes with a lot of responsibility and requires certain abilities. This can be made much easier if the fiduciary hires help as needed. They can retain lawyers, accountants, financial advisors, and in the case of special needs fiduciaries, they can hire healthcare professionals, advocates, teachers, etc. The cost of these services is often paid by the estate if there are sufficient funds available.

You should carefully consider whether there should be one fiduciary or multiple ones. An individual can take on one, two, or all three of the roles, depending on their abilities, but often it may take more than one person to do the job. Choose fiduciaries (1) who care, (2) whom you trust, and (3) who have some abilities in the areas in which they will serve.

The lawyer’s office is probably not the place to have the discussion about who will be your fiduciaries. While an attorney can provide guidance, the selection is not a legal issue; it is a personal one and often very emotional. I have seen many estate plans remain uncompleted because clients can’t decide on who should be their fiduciaries. Remember, fiduciaries can be changed at any time prior to your death and often should be.

It is advisable to select contingent fiduciaries in case the desired fiduciary cannot serve at the time needed. People go in and out of your life. Parents, who may be appropriate choices age and may eventually not be suitable. Siblings, too young at one time, may be able to take on responsibilities later. The stakes are too high not to decide, so my advice; soldier through and choose.

Step 4 – Create a Special Needs Trust

As mentioned previously, for an individual to qualify for SSI, they cannot have more than about $2,000 in assets. Eligibility for Medicaid services is also based on financial criteria. A special needs trust is a “magical” entity that can be established to hold assets for the benefit of a disabled individual without disqualifying them from needs-based government aid.

There are several types of trusts and the structure should be guided by a knowledgeable attorney. The trustee is responsible for doling out the assets of the trust to the beneficiary and at the same time making sure that the assistance provided is “supplemental” to what the government programs deliver in order not to disqualify the beneficiary from receiving government assistance. Even in situations where someone does not receive government aid, a special needs trust can be useful in creating a trustee relationship in the event the beneficiary cannot manage assets on their own.

Step 5 – Fund Your Trust

A trust is a great and powerful legal vehicle; but, if you don’t fund it, then it is just a lot of paper. The “shell” for the trust should be set up as part of creating your will, but it may not necessarily be funded until you die. In that way, you can maintain full control of your assets while you are alive. In your will, you can designate assets to go into your trust. Any assets can be placed into a trust including cash, investments, real estate, collectibles, etc. I find liquid assets are better because the trustee has immediate access to the cash instead of needing to sell an asset first.

For those that do not have sufficient resources to meet their trust-funding goals, I often recommend life insurance. Life insurance can provide significant leverage to the money you pay in premiums over the years and the policy’s death benefit proceeds can suitably fund a special needs trust upon the death of the grantor. A life insurance policy used to fund a trust should be a permanent policy. While term insurance is much cheaper, it is designed to expire long before you do. So, unless you die prematurely, it is unlikely that your term policy will still be in force when you die, hence the need for a permanent insurance solution.

The financial planning process can be particularly helpful in understanding how to fund a special needs trust. It can help focus on the appropriate size of the trust, the impact of inflation on the future value and buying power of the trust, and the best type of assets to fund the trust with.

In 2014, the Federal Government passed the Achieving a Better Life Experience (ABLE) Act. The ABLE act provides special savings accounts for disabled individuals. It permits people with special needs to own assets in excess of $2,000, which are not counted toward their “means-testing” for government benefits as long as the funds are held in a special ABLE account. While the passage of this act was a major step forward in the financial liberation of the special needs community, the monetary capacity of ABLE accounts both annually and in total is limited by law. So, opening an ABLE account may be a good financial supplement, but often not an adequate financial alternative to a special needs trust.

Step 6 – Draft a Letter of Intent

I recommend that all my clients create a “love letter” - sometimes called a letter of intent. It’s a way of telling your heirs and fiduciaries that you love them enough to make the process of settling your affairs easier. The love letter is not a legal document, but it is critically important. It contains all your important information. It includes a list of all your accounts, insurance policies, secret passwords, the names of your doctors, lawyers and other advisors, etc. My love letter is in a sealed envelope which I gave to my executor with instructions to open upon my death. Each year, I revise it and exchange the old one for the new one.

For special needs families, I recommend that they take the idea of a letter of intent further and include all the relevant information about their special needs member(s). It can have information on their diagnosis, treatments, medications, their doctors, therapists, teachers, and friends. It can also include details about their likes and dislikes, and any services they receive. The more details you include the easier the transition will be.

The six steps I have presented should be a checklist in the financial planning process for a special needs family. It is not meant to act as an instructional book. To do this well, you will need to engage with qualified guides such as financial professionals, attorneys, insurance brokers, etc., for many of these steps. I strongly suggest that you select individuals that have experience working in, and a commitment to, the special needs world.

The best advice I can give you is to keep in mind that intent does not equal execution!


Disclosures

Zev Grossman offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN). Investment advisory products and services offered through Equitable Advisors, LLC, an SEC-registered investment advisor.  Annuity and insurance products offered through Equitable Network, LLC.  Equitable Advisors and Equitable Network are affiliated companies and do not provide tax or legal advice. Representatives may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed. Your receipt of this e-mail does not necessarily indicate that the sender is able to transact business in your state. For more information about Equitable Advisors, LLC you may visit https://equitable.com/crs to review the firm’s Relationship Summary for Retail Investors and General Conflicts of Interest Disclosure.

CA Insurance Lic.# OJ12618

AGE-156057 (9/20)(exp.9/22)

Asset-Map