Special Advice For Special Needs Parents
May 4, 2016 by Christopher Robbins
When H. Mark Friese’s son, Christopher, was very young, his doctors said the boy wasn’t meeting his cognitive development benchmarks for attentiveness and interaction. When Christopher was age 1 and a half, the doctors diagnosed autism.
Mark Friese, of the Washington, D.C.-based Menick-Friese Group of Merrill Lynch, said the diagnosis changed his life. “We went through planning and realized there were things we didn’t know about,” says Friese, whose son is now 19. “There were fewer resources available at the time, and we struggled. It’s expensive to bring up a special needs child.
“I remember one year we spent over $100,000 on therapy for my son. The worst thing you can feel as a parent is not being able to take care of your child financially.”
Nearly 21 million U.S. families are raising children with disabilities, according to the U.S. Census Bureau. The subject of special needs planning also hits close to home for Mike Walther, president of Deerfield, Ill.-based Oak Wealth Advisors. Walther has a sibling with developmental issues, and he recalls the struggles his parents faced.
“These families have greater medical expenses and cost burdens to bear,” Walther says. “That’s why it is critical to know how to access government benefits and to guarantee [that] benefits don’t go away due to poor planning.”
Cynthia Haddad is another special needs planner who knows the struggles families face personally. She grew up with a developmentally disabled brother, Ron, and is supervising his care as an adult.
“When I started, I talked to planning firms to say that this was the market I wanted to serve, and I was told that they didn’t know anyone with a disabled child,” says Haddad, who is now co-director of special needs planning at Winchester, Mass.-based Shepherd Financial Partners. “Fast-forward 20 years and it’s completely different.”
John Nadworny, Haddad’s counterpart at Shepherd Financial, says the increased awareness of the challenges of raising disabled children has generated demand for planning. According to Nadworny, people used to naively assume that these children would somehow be taken care of as adults. “Now people are more aware of what they have to do, and they’re reacting.”
Children with special needs may need behavioral, psychological or physical therapy, special schooling and expensive levels of care. As they grow, the costs can escalate, even after their parents die.
“If [the parents] don’t plan, the child still has Social Security,” Friese says. “That helps. They’ll receive monthly benefits. But the child can’t have more than $2,000 in their name or it interrupts their benefits.”
If the disabled person has more than that amount in assets (according to a five-year look-back period), he or she loses eligibility for medical and financial benefits from Medicaid and the Supplemental Security Income program. Even affluent families need to plan so their wealth doesn’t disqualify their children. Health care expenses alone can balloon far beyond what they are prepared for, and programs like Medicaid help close funding gaps.
Medicaid is key to accessing education, adult day care, home health and other services. While wealthy families can pay out of pocket for assistance or equipment (avoiding the wait lists), some Medicaid programs don’t accept out-of-pocket payments.
“If I serve a family with no money, I have the same conversation that I have with people with significant wealth,” says Stuart Flaum, managing director of New York-based Special Needs Family Planning. “The concern is what you can and cannot do in order to benefit from the social service system. It’s the same for high-net-worth families as it is the client with no money.”
Flaum became involved in special-needs planning when his adopted son received a diagnosis of an autism spectrum disorder. Advisors must carefully ask questions about a special needs child’s longevity and quality of life: Will the child have a shorter life span? Will the child be susceptible to chronic or terminal illnesses? Will he or she be capable of living independently or working?
“Before you ask questions, listen and let them share their story,” says Maedi Tanham Carney, founder of Washington, D.C.-based M&L Special Needs Planning. “Let them unload on you and tell you where they’re at. Then ask the basic planning questions.”
Tanham Carney became immersed in special needs planning when her daughter, Ellie, was born with oral-facial-digital syndrome and intellectual disabilities. The first questions should be simple, says Andrew Vasquez, a planner with MetLife Premier Client Group of the Pacific.
“I give them my background and then I ask them if there is anybody in their family that has a diagnosis I should be aware of,” Vasquez says. “Families appreciate the way I put that. I’ve encountered households that have received advice for a long time, but the diagnosis wasn’t discovered until I asked.”
When his son was born in 2002 with CHARGE syndrome, a cluster of congenital problems caused by a genetic disorder, Vasquez became more involved in special needs planning. If you know a client has a special needs child, start them talking about the child, says Robert Johnston, a Milwaukee-based financial advisor with the Principal Financial Group. Johnston, who was struck by a car about 40 years ago and has had his leg rebuilt, had his own special needs to worry about when, in 2005, his 2-year-old son was found to have autism.
“It’s important to help families feel in control of their destiny,” Johnston says. “I like them to understand that I’ve been in their shoes and that, as a special needs parent, I live a similar reality. Hopefully our similarities serve as a foundation for a trusting relationship.”
A family’s first priority is to care for their special needs relative, so conversations about money can seem like distractions. “It’s estate planning in its highest form, placing a huge responsibility on advisors’ shoulders,” Flaum says. “Skilled, knowledgeable advisors call me with problems that they couldn’t have anticipated. You have to know so much to serve this group: Social Security, Medicare, Medicaid, food stamps, the ABLE Act and cultural differences.”
The bottom line is easy to calculate—subtract the child’s lifetime state and federal benefits from the estimated cost of his or her needs over a lifetime. The difference becomes the family’s savings target for the child.
“You have to add the cost of care into your plan,” Friese says. “Stage one is when [the family is] working and trying to raise the child. The second stage is when the family goes into retirement mode. The third is when the parents are no longer around. You’re determining whether there will be money left over for the child after analyzing the family’s needs.”
Once special needs children turn 18, they are adults with the right to make their own medical and financial decisions. But they may require a legal guardian to manage their needs. When they turn 21, many government and educational benefits end. In some states, 21 is also the age of majority—when parents will need to become the children’s guardians to continue managing care.
As the child ages, the parents age, too, but caring for a disabled family member saps finances. Parents may borrow against retirement plans or may not save at all. That means they need a financial plan involving continued care for their child, says Friese.
“These parents are spending $30,000 to $60,000 a year, and a lot of that is out of pocket,” Friese says. “You’re not only planning for the special needs child’s care, you’re trying to make sure the parents are OK.”
Planners have dubbed the issue “retirement for three” as parents never experience an “empty nest.” Around 25% of family caregivers are over 60, according to research by the University of Illinois, and the average age of a person being cared for at home is 38. More than half of special needs children outlive both parents.
Cost-cutting strategies such as downsizing homes or moving to lower-cost areas become impossible if medical and occupational resources for the disabled person aren’t available.
For many families, saving is difficult, Flaum says.
“We talk about what Medicare will look like and if they need care in a nursing home,” Flaum says. “Parents are going to do anything for their kids; that includes not planning for retirement. If I give them a choice to put more away for their child, if they are willing to go on Medicaid or enter a nursing home, most people will choose Medicaid or the nursing home and support their kids. That’s still a form of retirement planning.”
While most families plan to take care of their children only through the end of college, special needs families plan for a lifetime. “My plans are targeted towards making sure families have funds to take care of their individual with special needs,” Tanham Carney says. “Families ask what they should do first, and I refer them to a special needs attorney. I always say do your estate planning first, then focus on the financial life plan.”
A standard estate planning strategy can put special needs children at risk for losing benefits, says Flaum, so parents need a will that designates a special needs trust as a beneficiary. “This is a serious issue for young parents who haven’t faced their own mortality,” Flaum says. “They’re going to have someone who will be dependent on their decisions long after they’re gone. It’s critical to put the pieces in place so it can be an organic process.”
The only way to ensure the appropriate use of assets for a disabled family member is by putting them in special needs trusts, complex savings vehicles used by families in which savings, gifts and legal settlements for the child should be located.
If the trust’s funds are used for qualified expenses such as medical equipment, transportation, home health aides, education, rehabilitation, computer equipment and medical care not covered by Medicaid, they don’t count against benefit eligibility.
“These should be set up right away, even if the child is very young,” Friese says. “You never know when parents or grandparents are going to start contributing, and it’s not expensive to do.”
For most families, special needs trusts take effect when life insurance pays out. “I find that these families do not have sufficient assets to fund a retirement along with the child’s future,” Johnston says. “Life insurance can help fund the trust at the appropriate time. A survivorship universal life insurance policy works well because the trust needs to receive the financial assets at the passing of the second parent.”
If the client can afford it, permanent life insurance is preferred, says Friese. “A lot of people make mistakes in this area. It has to be permanent. Term insurance doesn’t work.”
But whole and variable universal life insurance may be prohibitively expensive for special needs families. That’s why Johnston recommends survivorship or “second-to-die” policies. The premiums are lower, and the trusts receive money when the beneficiary needs it.
“It assumes the child will be OK as long as one parent is living,” Friese says. “Either way, the beneficiary of the policy needs to be a special needs trust.”
Special needs trusts may be too costly and time-consuming to arrange for financially stressed families. That’s one of the reasons Congress created a new savings vehicle, the “529A” account, with the passage of the ABLE act in December 2014.
“The ABLE Act is going to let them save up to $14,000 a year,” Friese says. “It is structured similarly to a 529, and it can be used by the special needs child or adult for purposes of their own.”
Like their educational cousins, ABLE Act 529A plans allow tax-advantaged growth and savings. Now families can take a three-bucket approach to special needs planning: Social Security, ABLE Act accounts and special needs trusts.
“Social Security is immediate and it has to be spent down,” Friese says. “ABLE accounts empower the person with special needs to work, put aside money for savings or an emergency fund or to fund purchases like cars or homes. Special needs trusts are savings for the long term.”
Though there are more planners today than there were almost 20 years ago, few have special needs planning experience, so they should collaborate with specialists when possible, Friese says. “Families and advisors should be encouraged to reach out to a specialist,” Friese says. “I have people call me every day for my expertise, and I would lean on someone who has special needs experience if I didn’t have it myself.”
Some insurance companies train agents to serve these families, but these agents don’t necessarily serve the clients’ best interest. “When I first came across the special needs community, I found that most advisors were salespeople with products from the insurance industry,” Walther says. “We found that people wanted objective information. We were able to produce great client relationships by offering other options.”
Special needs planners don’t need affinity with their clients, but they should be willing to serve extraordinary clients with unique concerns. “Don’t dabble in this area,” Haddad says. “You can ruin a person’s life, you can ruin a family’s life. Improper planning can mess up their support system. You need to have more empathy and compassion, and keep a box of tissues handy.”
So special needs planning calls for a special kind of advisor, says Flaum. “At every level of advising we have to understand that we’re liable for a long time, maybe generations,” Flaum says. “It’s serious stuff, especially with special needs. If you plan appropriately, everything you plan today should be passed on and managed tomorrow. Today’s decisions have growing repercussions as time passes.”
