Retirement Planning for a Child with Disabilities

Failing to address changing needs in an estate plan is often problematic.  A huge example of this is not considering a child with a disability in retirement planning.  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.  Beneficiaries and fiduciaries named in your estate plan may move away, drift from your life, become ill, become wealth, have difficult relationship and so on.  All of these events suggest changes to your estate plan.  A child with a disability calls for a very specific type of change as they may utilize government benefits and receiving inheritance directly may cause them to lose those benefits.

Children with disabilities who receive Supplemental Security Income (SSI) and Medicaid may not have more than $2,000 of countable assets in their name. If they are listed as beneficiaries on retirement plans or life insurance proceeds, they may become ineligible for these benefits. Money should never be left directly to a child with disabilities, but it can be left through a Supplemental Needs Trust (SNT).  You can see this article for the broader discussion of these issues.  https://www.galliganmanning.com/how-does-planning-for-a-special-needs-child-work/

Parents may not realize how critical this is, or they may overlook changing beneficiary designations. Either way, the results can be financially devastating.  For that reason, we often build contingent supplemental needs trusts into our estate plans.  These help tremendously because even if there isn’t a beneficiary with a disability at the time we make the estate plan, there may be in the future, and if the client doesn’t update the plan, they might be stuck.

Talk with grandparents and any relatives who might want to leave something to a child of yours with disabilities. Chances are they have no idea how an inheritance can impact the beneficiary.  So, it is important to speak with them if they intend to leave retirement funds or other assets to the child.  It is often best to create one supplemental needs trust that all of the family members designate as the beneficiary of any assets they want to leave to the child with disabilities.  Coordinating your estate plans in this manner makes consolidates all of the assets in one place to make for an easy administration for the child.

Laws concerning Retirement Accounts have changed.  It is easy to forget because COVID-19 happened shortly after the implementation of the Secure Act, and understandably overshadowed it, but the Secure Act instituted a ten-year distribution rule for the payout of retirement funds to most beneficiaries.  However, the ten-year rule on required distributions does not apply to beneficiaries of qualifying Supplemental 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.  So, retirement planning with a child with disabilities is extremely critical, and is often best accomplished through the use of an SNT.

Life insurance is often used to care for a child with disabilities 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.  This is a classic way of funding the needs of the child after the parents can no longer directly provide for them.

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