After dealing with the shock of being diagnosed with a chronic disease, adjusting your financial and estate plans is a top priority. Thinkstock By Susan B. Garland, Contributing Editor From Kiplinger's Retirement Report, January 2015 A diagnosis of a debilitating chronic disease, such as Parkinson's or multiple sclerosis, can be frightening. But once you get over the initial shock, it's time to get down to work, drawing up financial and estate plans tailored to your medical condition.See Also: QUIZ: 10 Things You Should Know About Long-Term Care Your first task: Learn as much as possible about the likely progression and symptoms of your illness, and pass on the information to your advisers. Perhaps you'll require home health care at some point. If a wheelchair is in your future, you may need money to widen doorways in your home. And your doctor could be warning that you'll need to retire earlier than you had planned -- or maybe your spouse will need to leave work to care for you. With this information in hand, your financial adviser can adjust your investment portfolio and budget to prepare for projected costs. And your estate-planning lawyer may revise your power of attorney and health care directives to address the characteristics of your illness. "I've seen too many people panic and then make decisions that can be harmful," says Martin Shenkman, an estate-planning lawyer in Paramus, N.J., and author of Estate Planning for People with a Chronic Condition or Disability (Demos Health, $22). Your advisers "can help plan for this if you tell them what's going on," he says. Advertisement Shenkman learned the hard way how to give advice to clients with chronic illnesses. In 2006, his wife, Dr. Patti Klein, now 57, was diagnosed with multiple sclerosis. He was surprised by how little information was available on planning for a long-term illness. Shenkman started RV4TheCause (www.rv4thecause.org), a charitable organization that educates financial planners, accountants and lawyers. Shenkman, his wife and their terrier, Elvis, travel around the U.S. several times a year in their 2009 Airstream to give seminars. Several years after her diagnosis, Klein left her position as an anesthesiologist. The couple created a budget, which they periodically revise. After Patti lost her balance and fell down stairs in their house, they moved to a one-story apartment -- leveling the floors, installing grab bars and making other renovations to accommodate Patti's illness. They consolidated all of their accounts, set up automatic bill-paying and uploaded important documents online. This makes it easy to keep track of their finances, Shenkman says. If you automate routine financial tasks, he says, "you can devote more time to taking care of yourself." Financial planning for a chronic illness is not a do-it-yourself project. It's best to see an adviser who can run the numbers -- and perhaps calm nerves. Advertisement James Sullivan, a certified public accountant with Core Capital Solutions, in Naperville, Ill., recalls one divorced client who was diagnosed at age 65 with Parkinson's. "She was living like a pauper because she didn't know how her illness would develop," he says. After speaking with her doctor, Sullivan came up with an estimate of what his client's care could cost. He worked with an investment manager who designated $400,000 of her assets to a "care fund" that she could tap as her health deteriorated. Knowing she had funds set aside, the client's stress declined, he says. Besides a separate reserve, you could shift more assets to income investments, such as bonds. Figure how much income you may need for future care and perhaps fill part of the gap with a deferred annuity, which could kick in when your costs are expected to rise, says Cyndi Hutchins, director of financial gerontology at Bank of America Merrill Lynch. "These types of investments allow you to turn on the income stream when you need it down the road," she says. If a client needs to move to a facility, Steven Starnes, a certified financial planner at Savant Capital Management, in McLean, Va., will "build different scenarios" that account for the facility's costs, the client's finances and the type of illness. Perhaps a client is considering a move to a continuing-care retirement community. If the disease is expected to progress slowly, the best option may be a CCRC that has a large entrance fee but lower monthly charges and no added costs for care, Starnes says. A client who may not live that long may opt for the facility that has higher monthly costs but no big entrance fee. Advertisement Create a team. Add a geriatric care manager to the mix of certified financial planner, accountant and estate-planning lawyer. A care manager can assess local facilities, recommend home-safety modifications, hire home health aides and find transportation services. The manager can also speak with your physicians and report back to your other advisers. (Find a local care manager at the Web site of the National Association of Professional Geriatric Care Managers at www.caremanager.org.) Also involve family members after a diagnosis. "It's helpful to identify family members who can commit to a level of care," Hutchins says, such as driving you to doctor appointments. Check health care coverage. To reach realistic cost projections, you should review the daily costs of home health care, assisted living, nursing homes and adult day care in your area, and then adjust for inflation for the years you may need such services. You can find local costs at www.genworth.com. "It doesn't hurt for the patient and family members to tour facilities while the patient can still make decisions," Hutchins says. Look for ways to cut drug costs. "When there's a chronic illness that requires a major drug, the costs will shoot right up," Sullivan says. Arthritis drugs, such as Enbrel, can cost $30,000 a year, while multiple sclerosis drugs, such as Avonex, can cost $60,000. Advertisement These are "specialty drugs," which treat complex conditions and usually lack generic versions. Insurers often require patients to pay a percentage of specialty-drug costs rather than a flat co-payment of, say, $20. If you're on Medicare, review your Part D prescription-drug or Advantage plan after your diagnosis. By moving a client to another Part D plan during the recent open enrollment, Sullivan was able to slash her out-of-pocket drug costs by more than half. "It's typical for someone to enroll in a plan and not look at it for three or four years," he says. "But one of the expensive drugs may not be on the formulary." If you get Social Security disability benefits, you will get Medicare coverage after two years, even if you're younger than 65. If you're not on Medicare, ask an insurance broker to help you find a plan that covers much of your drug costs. As for the health care exchanges, a study by HealthPocket.com found that average out-of-pocket costs for patients taking one of five common specialty drugs were lowest for platinum plans, even though those plans charge higher premiums than gold, silver and bronze plans. Some foundations, states and drug companies offer programs to pay some out-of-pocket costs that your insurance doesn't cover. You could get discounts, help with co-payments or several months of free prescriptions. Some programs require proof of financial need, while others don't. "It all depends on the drug, the company and the condition," says Tricia Blazier, personal financial planning manager at Allsup, a firm that helps people get disability and health care benefits. You can find links to programs at the Partnership for Prescription Assistance (www.pparx.org) and at RxAssist (www.rxassist.org). Also check with the research organization for your disease to see if it offers financial help. Review your insurance. If you have a long-term-care policy, file for benefits quickly. Some people delay because they worry that they will exhaust their benefits early. But a three-year benefit period, say, could last many years longer if you don't need care every day. Also make sure you have enough liability insurance. "If you have a serious illness and get into a car accident, you may have a harder battle proving the illness was not the cause of it," Shenkman says. Liability insurance will also cover workers in your home. If you have life insurance, you may be able to accelerate your death benefits or take a loan against your policy to pay for medical costs. Either action would reduce the death benefit, though. Another option is to sell your policy -- either a universal, whole or term policy -- to a company that could provide monthly tax-free checks to pay for long-term-care expenses, says Kim Natovitz, president of The Natovitz Group, in Bethesda, Md., an insurance consulting firm. "A long-term-care benefit account creates another pool of money to help pay for care," she says. Any money left in the account when you die could go for burial expenses and to your heirs, Natovitz says. You also could create an income stream by converting a term-life policy to a permanent-life policy. A term policy does not build up cash value and lapses when the term ends. And if you have a term policy from your employer, you will lose the coverage once you leave your job. But if you convert it, you'll salvage coverage -- although you could pay large premiums to do so. At the time you convert, the permanent policy would not have accumulated any cash value. But you could let the policy build up its cash account, which you could draw on years later when your medical expenses rise. Or you may be able to sell the policy to a life settlement company. Natovitz recently worked with a client who had to retire when he became ill. His life expectancy is just two years. He would have lost his term policy, which had a face value of $725,000. He converted to a whole-life policy, agreeing to pay $42,000 a year in premiums. He's tapping his investments to pay for his care, and his wife will be able to live on the death benefits. Limit your tax tab. If you apply for Social Security disability benefits, it's likely you will receive a lump sum that includes back payments to cover the months or years from the time you applied to the time you were approved. Many recipients worry that the large payment could push them into a higher tax bracket. Disability payments are taxable, as are all Social Security benefits. But retroactive lump sums are treated differently. You report the payment in the year you receive it, but you do not treat all of the payment as taxable income for that year. You will need to calculate the tax on the portion of the benefit from an earlier year based on your income for that year. "Make sure that lump sum is allocated correctly," Blazier says. Otherwise, you will pay more tax than you owe. (Use the worksheet in IRS Publication 915 at www.irs.gov.) You can deduct medical expenses that exceed 10% of adjusted gross income (7.5% if either spouse is 65 or older in 2015). You can write off the cost of a nursing home and assisted-living facility, as well as the medical portion of a continuing-care retirement community. Under certain circumstances, you may be able to deduct personal care services. You also can write off home improvements, such as installing wheelchair ramps. The cost of improvements is reduced by any increased value to your home. (Read IRS Publication 502 for details on medical expenses.) Your medical deductions can offset the tax bite on withdrawals from an IRA to pay for care. "If someone is living in an assisted-living facility, there may be an opportunity to deduct the full cost of care," Sullivan says. "You can pull out additional money from an IRA and not pay additional income taxes." Draft financial and health directives. You may already have drawn up a financial power of attorney, a health care proxy and a living will. But once you receive a diagnosis, you should revise those documents to address the characteristics of your particular illness. With a power of attorney, you designate someone to make financial and legal decisions if you become disabled. There are basically two types: a durable power of attorney, which goes into effect immediately, and a springing power, which springs into action when someone is proven to be disabled and needs assistance. Shenkman says the springing document can be a problem in part because "it's difficult to figure out how disabled you have to be" -- and legally proving incapacity could take time. The durable power of attorney is more tailored to a chronic illness, such as colitis or chronic obstructive pulmonary disease (COPD), because it gives your agent control only when you are temporarily unable to handle your financial chores. "A lot of disabled people will have an attack or a flare-up for two or three weeks, can't handle financial matters and then get back in the saddle," he says. Someone with a chronic illness should consider including a compensation clause, Shenkman says. "Most people think of a friend or family member helping out for a week," he says. "But this person could be managing your finances for 10 or 20 years." Compensation, he says, would encourage an agent to devote enough time to your financial needs. Also review your health care documents. With the proxy, you designate an agent to make health care decisions if you are incapacitated. The living will defines your health care wishes. Customize those documents to address your condition, Shenkman says. For example, while a standard living will may prohibit the use of a breathing tube, a person with COPD may need intubation for a short period. Someone in the early stages of Alzheimer's disease may want to give directions on the kind of setting that he or she would prefer for non-home care (read Alzheimer's Patients Can Craft Care Plans). Your health care agent should understand your disease and your wishes, and should live close enough to be able to respond quickly to emergencies. And make sure that the financial and health care agents you may have chosen years ago still want to serve. They may balk at all the extra work.