I became a Certified Financial Planner (CFP) in 1990 and then became the father of a child with Down syndrome in 1994, so I have been working on issues related to personal financial planning for children with disabilities for quite awhile. Here’s some of what I’ve learned along the way.
It’s been said that families of people with disabilities need “a financial plan on steroids,” but that’s not the whole story. I’ll share some basic facts you should know about getting state and federal benefits, preventing financial disaster, and changing a typical financial plan to build more secure and meaningful lives for our children with disabilities.
As I’ll explain below, the three key elements in preventing a tough situation from becoming a financial disaster are: a good understanding of government benefits, an appropriate estate plan, and the right insurance to secure it.
Four government programs form the cornerstone in the foundation of support most people with disabilities need.
Social Security and Medicare are insurance plans. Your child’s ability to qualify for these programs is based on their own work history or that of their parents, if the child becomes disabled before age 22. Social Security Disability Insurance has become increasingly difficult to qualify for, but once someone has been on SSDI for 2 years they can qualify for Medicare.
Supplemental Security Income (SSI) and Medicaid are needs-based entitlement programs for folks with very low incomes and few assets. SSI can pay a monthly benefit of roughly $800. Medicaid pays for a wide variety of health care expenses at no cost to the beneficiary.
Getting and keeping eligibility for these programs can be crucial for the financial security of people with disabilities.
It’s important to avoid losing the support provided by these government benefits. This can happen through gifts or inheritance. If someone receiving SSI and Medicaid inherits even a few thousand dollars, they immediately lose their health insurance and income. The state of Texas can also claim some or all of the inheritance as a repayment for benefits previously received.
Disinheritance (not leaving money to your child) is not a good solution. Money left to a sibling or another close relative, even if the heir truly cares about their relative with a disability, may be lost as a result of divorce, lawsuits, or other hazards.
To avoid the sort of problems outlined above, and to ensure the orderly transfer of assets to provide support for a relative with a disability, you need a discretionary trust (also known as a supplemental needs trust or special needs trust). Money and assets placed in such a trust are neither owned nor controlled by the beneficiary (person who gets the money from the trust), so they will not put government benefits at risk.
Many estate-planning attorneys don't understand the need for special needs trusts. The standard boilerplate trust language in most wills does not meet the needs of families in which a child has a disability. To get an appropriate estate plan in place, families will need to find a lawyer who understands government benefits for individuals with disabilities and understands special needs trusts. Connecting with other parents or to parent support and advocacy groups may be good ways to get referrals for lawyers, as is the National Academy of Elder Law Attorneys.
Life insurance is more important for families where dependents (children or others who depend financially on parents) have disabilities than it is for other families. Providing for a child with a disability is one of the best reasons for buying at least some permanent life insurance. Second-to-die or survivorship life is often the most appropriate product for this permanent need.
Our financial lives have just three phases: dependency, accumulation, and distribution. People with disabilities follow the same financial path as their peers without disabilities, though someone with a disability will likely spend somewhat more time in dependency and distribution and less time in accumulation.
That’s why families like ours need more than a disaster prevention plan. We may not need to have “a financial plan on steroids,” but we do need a solid plan. In my experience, financial plans for families like ours are more alike than they are different from those created for others.
The truth is, most families struggle to reach the point where work becomes optional. The key to long-term financial success is saving at least 10% of what you earn. If you have a child with a disability, I recommend increasing the long-term savings rate to 15%. This 50% increase in the savings rate might seem daunting, but it makes sense for families working toward a 3-person (and possibly 2-house) retirement.
For help with improving cash flow management, I highly recommend the book All Your Worth by Elizabeth Warren and Amelia Warren Tyagi.