How to Provide for Your Disabled Adult Child's Future

How special needs trusts and last-to-die life insurance policies can help

By Janet Reynolds, Next Avenue
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All parents worry about what will happen to their children after they die. Parents of adult children with a chronic disability have an additional concern: whether the child will have financial security.

The good news is that an option does exist to help provide some security for your adult disabled child, and you don’t have to cut into your own retirement savings to take advantage of it. You also don’t have to risk alienating your other children by naming this child a favored beneficiary in your will.

How? By creating a special needs trust for your child and funding it with a last-to-die life insurance policy.

Here’s what you need to know to get started:

What Is a Special Needs Trust?

A trust is basically a document that creates a legal relationship between three parties: the donor, or person(s) funding the trust; the beneficiary, or person receiving the benefits of the trust and the trustee, or person(s) administering the trust. A special needs trust is one that is created specifically to provide additional funding for someone who has special needs such as disabilities.

Harry Margolis, a partner with the law firm Margolis & Bloom, based in Boston, says there are two reasons to create a special needs trust.

“One is financial management, because a lot of people with disabilities may not be able to manage their own funds or might be more susceptible to people taking advantage of them,” he says.

“The other reason is so the funds in the trust won’t be counted should they need additional government benefits, such as Section 8 housing, SSI [Supplemental Security Income] and/or Medicaid. If the trust is properly drafted and administered, you can have the benefit of the funds in the trust and still be eligible for these programs,” Margolis says.

One of the criteria for remaining eligible for Supplemental Security Income, or SSI, payments is that the disabled person can’t have more than $2,000 in his bank account at any one time. A lump sum inheritance, then, would cancel out that SSI benefit. The government does not, however, count money put aside in a special needs trust toward SSI eligibility.

For most families, the two most common special needs trusts are first party or third party trusts, Margolis says. In both cases, the beneficiary is the person with the disability.

  • First party trusts: the trust holds the assets, which belong to the beneficiary. The assets might come from an inheritance or perhaps settlement money. When the beneficiary dies, any leftover funds are subject to a payback clause, which means the funds revert back to the government for any federal dollars the beneficiary has received in his lifetime.

  • Third party trusts: the assets from the trust go to a trustee, rather than the beneficiary. The key upside of this kind of trust, Margolis says, is that any funds left over after the beneficiary dies can be distributed to contingency beneficiaries, such as other siblings. The trust does not have the payback requirement.

Beyond setting aside some cash for your child, special needs trusts are also not subject to probate court, says Margolis, who oversees two websites devoted to helping parents navigate special needs: ElderlawAnswers.com and SpecialNeedsAnswers.com. “If the trust is already created, it’s [the insurance policy payout] payable to the trust,” he says, “and you should get payment pretty quickly. You don’t have to go through probate.”

Funding the Trust With a Last-to-Die Insurance Policy

A trust, of course, is only as good as its assets. “Having the trust can give a false sense of security until you take next step, and that is to make sure there is money in that trust,” says Cynthia Haddad, co-founder of Special Needs Financial Planning, a specialty practice with Shepherd Financial Partners in Winchester, Mass.

That’s where last-to-die — also known as second-to-die and survivorship life — insurance policies can help. Parents may have done everything right about their own retirement planning but still not be in a financial position to take on the additional expense of providing for a child who became unexpectedly disabled as an adult.

Add other siblings into the equation and things can get dicey fast. Parents don’t want to add a financial burden to those siblings who may already be primed to have additional caregiving duties. And those siblings may also feel resentful if an estate plan is suddenly changed so all the money goes to the disabled sibling.

“Second-to-die life insurance is one of easiest ways and most cost effective ways to supplement special needs trusts,” says Haddad. “You pay a small amount in premiums and get a lot in death benefits.”

In a last-to-die policy, the policyholder pays an annual premium for a certain amount of life insurance. The policy pays out only after the second partner dies and that money can, if there is a special needs trust, go directly into the trust without going through probate court.

Tips on Last-to-Die Policies

Haddad offers some pointers on what to look for when funding a second-to-die insurance policy:

  1. Parents should make sure their own policies and retirement planning are in good order. “Put on your own oxygen mask first,” she says. “You have to take care of Mom and Dad first.”

  2. Make sure ownership of the assets and beneficiary are properly allocated. She recommends naming a contingency beneficiary to the trust so that any leftover funds would go to that designee.

  3. If the adult child is living at home and paying a “fair share” rent to the parents (perhaps from SSI income), this money can potentially be used to pay for the last-to-die policy since the parents are acting as de facto landlords. “They have that money to use however they want,” says Haddad. “It could be used toward the premium for second-to-die life insurance.”

  4. Be sure to factor in the cost of the annual premium as part of your retirement planning. “You can handle it now,” she says, “but maybe not when you’re retired. Watch what you’re doing.”

  5. Buy what you can afford. If money is no object, Haddad advises looking at the child’s lifestyle — where he will live, what kind of caregiving needs he might have, where he will work — and running a financial accounting out for his potential lifetime. If the trust includes owning a house, account for potential upkeep. Remember: any leftover trust funds, assuming it’s a third party trust, could potentially go to the other siblings if they are named as contingency beneficiaries. “It can take out of the equation why are Mom and Dad leaving more money to Johnny,” she says. “Everybody else still gets their inheritance.”

  6. Build a team to carry on. “Mom and Dad do a lot,” Haddad says. “When they’re gone, it takes more than just one or two people to replace them. Who’s handling all that day-to-day stuff?” she says, noting that sometimes siblings don’t want to be trustees. “Make sure there is enough to pay for professional trustees, professional guardians.”

  7. Work with financial planning and insurance specialists. “You don’t go to your primary care physician for a cancer issue. You need to go to cancer specialist,” Haddad says. “You’re ratcheting up your need for special advisers. You want to know you’re working with people who understand your child’s unique needs more than you do. It’s a different world you’re entering in.”

Another Option: ABLE Accounts

When you’re looking for ways to save for your adult disabled child’s future, you’ll also want to know about Achieving a Better Life Experience, or ABLE, accounts.

ABLE accounts are savings accounts that enable a person with a disability that began before age 26 to put aside more than the $2,000 allowed to continue receiving SSI benefits. The accounts let a person who is working at some capacity, for instance, to put aside funds.

Each state has different criteria for creating an ABLE account. But it can be another savings option and a good complement to a special needs trust, especially since parents can give up to $14,000 annually to this account without penalty. Says Haddad: “It’s a wonderful way to gift money to individuals with disabilities.”

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