Having three kids of my own has only added to my appreciation for everything parents do for their families. Growing up with an autistic brother, my appreciation goes even further for families with special needs loved ones. Sometimes we are just getting through the day, and we don’t have the time or energy to consider planning for down the road.
The good news is that many of the biggest mistakes in special needs financial planning are avoidable. Here are five of the most costly mistakes I see families make, and what to consider.
1. Not Establishing a Third-Party Special Needs Trust
A third-party special needs trust is a critical part of many families’ financial plans.
It allows family members to leave money for a loved one with special needs without giving those assets directly to them, which could affect eligibility for means-tested benefits like Medicaid and Supplemental Security Income (SSI). It also can serve as protection for individuals who are a little more independent but potentially vulnerable to scams or fraud.
But the details matter. These trusts should be drafted by an attorney who specializes in special needs planning. The right language, and how the trust is ultimately funded and managed, can make all the difference.
2. Not Using an ABLE Account
ABLE accounts have come a long way over the past decade and can give families much-needed flexibility.
For eligible individuals, an ABLE account provides a place to save and spend money for qualified disability expenses while receiving favorable treatment under certain government benefit rules.
I’ve seen families become so concerned about SSI and Medicaid’s strict resource limits that they’re afraid to use the money their loved one receives. On more than one occasion, I’ve even seen families leave SSI checks uncashed and sitting in a drawer. That money could be making a meaningful difference, helping pay for summer camp or respite care for Mom and Dad to enjoy a much-needed night out. Families shouldn’t feel they have to let those resources go unused simply out of fear that using the money could jeopardize their loved one’s benefits.
3. Not Revisiting Beneficiary Designations
When was the last time you checked the beneficiaries on your life insurance, retirement accounts, and other financial accounts? If your loved one receives means-tested benefits, leaving assets directly to them may create future problems with their eligibility.
While special needs trusts are a critical part of many families financial plans, establishing a special needs trust is only half the job. Families should also work with their attorney and financial advisor to make sure beneficiary designations are coordinated with the overall estate plan.
One outdated beneficiary form can undermine years of careful planning.
4. Missing a Retirement Account Planning Opportunity
Retirement accounts deserve special attention in a special needs plan.
Under current retirement rules, many beneficiaries who inherit a retirement account must withdraw the assets within 10 years. However, individuals who meet certain disability or chronic illness requirements may qualify for an exception that allows distributions to be stretched over their life expectancy.
Certain properly drafted special needs trusts may be able to take advantage of these rules as well.
For families with significant IRA or retirement assets, this can have major tax and long-term planning implications. It’s worth discussing with an attorney, financial advisor, or tax professional who understands these specialized rules.
5. Failing to Build Financial Independence Into the Plan
This one might get me in trouble with readers. As I said at the start, I was drawn to special needs financial planning because I admire everything parents do for their kids. At the same time, a durable special needs plan shouldn’t rely on any one family member remembering to do everything. It’s important to bring a future guardian or caregiver into the process before they’re needed.
If my brother has systems in place to automate paying rent, deposit SSI checks, and manage other expenses from his bank account, that’s better for him. It’s also better for me, my wife, and my children, who will all likely help manage his finances in the future.
Automating appropriate payments, documenting important processes, and considering a knowledgeable professional trustee can also reduce the burden on parents, siblings, guardians, and caregivers.
The Goal Is a Plan That Works for the Whole Family
Special needs financial planning isn’t just about leaving enough money behind. It’s about making sure that money goes as far as it can, benefits are protected, and the plan can continue working even when parents are no longer there to manage everything.
The best plans don’t depend on one person getting everything right. They create a system designed to support your loved one for the long term, and one that someone else can carry out.
This article is for educational purposes only and is not individualized legal, tax, or financial advice. Special needs planning rules are complex and can vary based on individual circumstances. Families should consult qualified professionals familiar with special needs planning.
About Brett
Brett Corsello is a Partner and Portfolio Manager at Juno Financial Group in Richmond, VA, where he leads the firm’s Special Needs Financial Planning Practice. He is a Chartered Financial Analyst (CFA) and a Chartered Alternative Investment Analyst (CAIA).