Planning for the Financial Future of a Child with Multiple Disabilities: Steps 1 Through 12
by Steve Morris
Step 1: Decide What the Future Looks Like for Your Child
First, decide on future plans for your special needs child after your death or if you become unable to care for them. Consider where they will live, employment possibilities, and future education. Also address details like their social life and religious preferences. Finally, any special medical care issues should be thoroughly discussed at this stage in the process.
Step 2: Write a Letter of Intent
Write a “Letter of Intent” for your child. The letter of intent is a document where parents express their hopes, desires, and goals for their child in their own words. Its main purpose is to guide the guardian, advocate, and trustee of your child’s special needs trust. This letter stems from family discussions on issues highlighted in step one. For a detailed understanding of the letter of intent, visit www.bridges4kids.org/letter-of-intent-form.pdf. This link provides in-depth information on developing the letter.
Step 3: Choose an Advocate and Guardian for Your Child
Choose an advocate and possibly a guardian for your special needs child. This person (or persons) will be responsible for carrying out your wishes as expressed in your letter of intent. This person can be a family member such as another adult child, a relative, friend, or any other trusted party including a charitable group, commercial organization, or public guardian. The basic role of this person is to step into the parent’s shoes as much as possible and then see to it that all elements of your letter of intent are carried out. Whoever is chosen must obviously be someone who you trust and ideally also has a strong current relationship with your child.
Step 4: Determine the Costs of Your Child’s Life Plan
Determine the realistic costs for developing your child’s comprehensive Life Plan. Creating a Life Plan for a special needs child often involves upfront costs. These include financial planning and legal fees, which can vary widely. The cost depends on your financial complexity and the professionals’ expertise. Some organizations specialize in special needs planning, offering package deals covering all services, often including legal fees.
Alternatively, working with various unconnected professionals might cost more. They may not specialize in this area, leading to higher fees due to extra research and inefficiencies. To ensure accurate planning, it’s advisable to find a specialist or organization experienced in this field. Mistakes in this area can be costly.
Parents should also explore “Master” or “Community” special needs trusts. These are set up under federal law, either at the state level or by local non-profits focusing on disabilities. This option can be more affordable, especially for parents with limited resources. While planning is still necessary, it avoids the cost of creating a personal special needs trust.
Step 5: Determine the Level of Funding Required for Future Needs
Determine the level of funding that will be required to meet the future needs for your child. To determine your child’s needs, you should first examine all aspects of your child’s future care needs with a particular focus on the cost of providing all the goods and services he or she will require. This is always a difficult task since there are so many unknowns in the future. However, in spite of these unknowns, it is always better for the parents to go through this analytical process rather than some unknown but well-meaning government bureaucrat.
A good place to start is to develop a budget for your child based upon the assumption that you are now deceased (see “Supplementary Expense Worksheet”) and then account for the information determined in steps one through three. This allows you put a dollar amount on all aspects of your child’s care so that you end up with a determination of how much additional funding you will need to provide in order to assure that your child has a good quality of life.
Next, you will need to examine your own personal financial planning situation. At a minimum, this should entail the development of a personal financial statement so that you can see how much of your estate would be available for funding your child’s future needs deficit. Ideally, some trust fund analysis should be completed to determine your funding target.
Step 6: Prepare Your Last Will and Testaments
Draft Last Wills and Testaments for both parents with precise wording. Include legal documents like Powers of Attorney (POA) for both parents. Also, consider appointing a guardian or POA for your child. The crucial point is to create “pour over” wills. These wills should not leave assets directly to your special needs child. Instead, they should transfer their share to a special needs trust, as explained in the next step.
Step 7: Establish a Special Needs Trust
Establish a “Quality of Life” special needs trust for your child which will hold and manage all funds left to your child for the rest of his or her life. Ideally, the trust should be a “living” trust so that it can be used while the parents are alive, and it should also be fully “discretionary” so that it can’t be attacked as a “support trust” by the government authorities.
Another critical part of this step is the selection of “successor trustees” who will serve after you are gone. These people or professionals will manage the trust fund for your child’s benefit. See the “Special Needs Trust Worksheet” for guidance on selecting successor trustees. If individuals are chosen as successor trustees instead of a professional trustee (which is commonly done), they need to be made aware of the unique fund management requirements of special needs trusts due to the income tax treatment of such trusts. So when individuals are chosen, it is often advisable to have an investment professional who is experienced in special needs trust fund management available to assist with the key investment decision making.
Once established, the special needs trust’s overarching purpose is to assure a “Quality Life” for your special needs child. It accomplishes this by protecting all current and future government benefit programs as well as providing for those areas of need not provided by the government programs. For example, if your child needs new furniture, the trust can pay for it; also vacations and guardianship costs can be paid for. If your child needs a medical procedure that Medicaid/Medicare doesn’t cover, the trust can pay for it. When properly drafted, these trusts have a lot of flexibility in paying for all those extra things that will enhance your child’s quality of life.
Step 8: Find Funding Sources
Once your child’s funding needs are determined (Step 5) and the special needs trust has been established (Step 7), it is now time to decide how you are going to actually fund your child’s trust. At this point, the main task is to select a combination of current and future resources that will be earmarked for your child’s trust. In Step 5, you determined how much the funding deficit was based upon your child’s needs as well as your resources. Now, you need to select which resources to earmark for your child’s trust.
Parents need to first know that some resources are much better than others for funding the trust. For example, a major asset many parents own is a retirement plan (IRA, 401K, etc.), yet retirement funds are probably the single worst asset parents can use to fund the special needs trust. The downside is due to the income tax burden of these funds when payable to a special needs trust. But an equally big problem is that many parents will use up these funds for their own retirement, which is their primary purpose.
Most other kinds of investments such as savings, mutual funds, stocks, and bonds should work just fine. But if there are still deficiencies, then probably the best way to fill the gap is with life insurance, and usually, the best type of policy is one that insures both parents and is payable only after both are deceased (these are called “joint survivor” or “second-to-die” policies).
Step 9: Organize Life Plan Documents
Organize all your Life Plan documents and legal papers in a folder or notebook for easy access during updates. Keep important documents like your letter of intent, special needs trust, wills, Powers of Attorney (POAs), guardianship papers, and government documents (like SSI and Medicaid cards) at hand. Also include information about funds for your special needs trust, among others. This organization not only helps you but also simplifies things for others involved in your child’s Life Plan. It also allows them to understand your plans and their roles more easily.
Step 10: Meet with All Parties Involved
Organize a meeting with everyone involved in your child’s life. Explain their roles and the location of your Life Plan binder or notebook. Give copies of pertinent documents to each person. For instance, the first successor trustee should receive the trust document to understand its terms.
All parties must have your letter of intent. This helps them get acquainted with the entire Life Plan for your child. It’s also wise to inform immediate and extended family members, especially grandparents, about the special needs trust. This is important if they wish to leave something for your child. For guidance on this communication, refer to a sample letter about a special needs trust.
Step 11: Review Your Child’s Life Plan Regularly
Review your child’s Life Plan on a regular basis but at least annually. Life circumstances and state and federal laws impacting your child’s benefits can change. A recommended time to review these annually is on your child’s birthday. It could also be during the year-end holiday season, when family matters are often top of mind. If you’re working with professional advisors, it’s wise to consult them too. They can update you on any financial or legal changes that might affect your Life Plan.
Step 12: Relax
RELAX! You are done for now. All you have to do in the future is to review your plans as noted in Step 11.
Caveats and Disclaimers
The information provided here is not intended to be exhaustive on the subject of special needs planning. Entire books have been written on this subject, so the objective here is more limited in scope. Our goal is to offer enough information for parents to grasp the key issues. This knowledge will guide them in taking steps to achieve their goals for their child through a Comprehensive Life Plan. While we discuss legal terms and devices like special needs trusts, wills, guardianship, etc., please note that this isn’t specific legal advice. We strongly advise each family to seek proper legal counsel when implementing elements of a Comprehensive Life Plan for their child with special needs.