4 Financial Steps to Care for Your Child with Special Needs

"I have stayed awake worrying about our son’s future every night for the past 15 years. Who will care for him once we’re gone? If he’s not able to be financially independent, how much do we need to have saved for him?"

These are the comments and questions from one of my clients during our first conversation about her son with special needs, and they are not unique to her. I hear these common themes from most parents of children with special needs that I meet.

The daily demands of doctor’s appointments, therapy sessions, school meetings to review their Individual Education Program, and the myriad other responsibilities consume all a parent’s mental energy and focus. There is not much time left to plan for the future. It can be overwhelming to say the least.

But help is available. As someone certified as a Chartered Special Needs Consultant®, I worked with this family for several months to chart a financial path. It addresses four fundamental financial steps to build a comprehensive financial plan for a child with special needs that can apply to other families.

Step 1: Have a Current Will and Name a Guardian for Your Child

Every parent needs to have a current will in place. Wills direct where assets will go after one’s death, but for parents of minor and/or dependent children they are so much more important.

Your will names the person(s) you choose to be your child’s guardian if you pass away prematurely. For your child with special needs, it is important to think about the amount of time your child may need a guardian since it could include their adult life. For this reason, you should choose successor guardians who can step into that role after the primary guardian is no longer capable of serving in that capacity.

One of my clients has named his mother as the guardian of his daughter, but given her advanced age, has also named two of his siblings as successors. And they can step in and provide care when needed.

You may choose to have a different family member serve in the role of trustee to oversee the financial aspects of your child’s life as those two duties can be divided. Naming a guardian should be reviewed at least every five years, or more often as life events affect the guardian’s ability to take this responsibility. A legal document naming your child’s guardian should be your first priority in your financial planning journey.

Step 2: Create a Special Needs Trust

Any assets left to your child with special needs should be placed in a special needs trust. These trusts serve a variety of purposes,  including providing financial oversight, protecting your child from those who may take advantage of them and preventing disqualification from certain public benefits, such as Medicaid and Supplemental Security Income (SSI).

When meeting with an estate planning attorney to draft your wills, you should also request that they draft language to leave any assets to your child with special needs in a special needs trust. This allows you to name a trustee to oversee the management of any funds left to your child. It is also important to communicate with other family members or close friends who may plan to leave money to your child in their wills. Doing so will help avoid potential disqualification from these crucial public benefits by a sudden infusion of assets into your child’s estate. Without a special needs trust, having more than $2,000 in cash and/or investment assets can disqualify an individual from receiving certain public benefits.

Step 3: Acquire Life Insurance, If Needed

Once the special needs trust is created, it needs to be funded with enough assets to provide for your child for the rest of their life. If you do not have enough savings and other assets, life insurance can be an excellent tool and is used by many parents to create instant liquidity if needed. A financial planner or life care planner can estimate the amount of money needed to care for your child for their lifetime. From there, you can determine how much life insurance is needed once you have that estimate.

For married couples, a survivorship policy is most commonly used to fund a special needs trust. This is because the death benefit does not pay out until the second spouse passes away, which is when the funds are needed to provide for the child. Premiums for a survivorship policy may also be lower than an individual life insurance policy on each parent. The ownership and policy mechanics can be complex, so work with a knowledgeable financial adviser to guide the process of acquiring this coverage.

Step 4: Open and Fund an ABLE Account

If you have money set aside for your child today, you should consider opening an ABLE (Achieving a Better Life Experience) account. This account can be set up online through a state-sponsored program and allows you to save and invest after-tax dollars. Any growth from these funds can be accessed tax-free for the benefit of your child with special needs. The list of qualified disability expenses is extensive, but be sure to follow your plan's guidelines on expenses to avoid paying taxes and a 10% penalty on the distributions.

Annual funding is capped at the annual gift tax exclusion ($16,000 for 2022) per year per beneficiary. If you child works, they may be able to contribute additional money to the account beyond the cap. However, as the value of an ABLE account grows if it is valued at $100,000 or more, it can disqualify a person from receiving some Social Security Income benefits. For that reason, many families manage the distribution and addition of funds to this account to keep the balance below that threshold.

Once completing these four steps with the client I mentioned earlier, she let me know some of her most overwhelming worries had been addressed. Now, she has a plan for her son’s future. By taking these four steps, parents can be well on their way to providing a financial future for their child. And it will help provide some peace of mind that some of the biggest planning objectives have been covered.