Special needs families are accustomed to things being more complicated, and retirement planning is no exception. Parents must plan for their own retirement as well as ensure that a plan is in place for the time when the parents are no longer able to care for their special needs child. That includes everything from the basics, like making sure that beneficiary designations are up-to-date, to ensuring that the child’s inheritance does not make the child ineligible for means-tested government benefits.
A recent MarketWatch article, “Parents of special needs children plan for two futures,” says that special needs parents are really planning for two lifetimes. In 2030, there will be approximately 1.2 million adults age 60 and older in the U.S. with developmental disabilities. That’s about twice as many of the 642,000 who fit that profile in 2000, according to 2012 research by the University of Illinois at Chicago. Also, according to the National Down Syndrome Society, today people with Down syndrome have a life expectancy of 60, compared with just 25 in 1983.
It’s critical that parents make certain that any savings and investments won’t disqualify their child from means-tested government benefits, which can impact the parents’ ability to save for retirement. To avoid this, parents should ask an elder law or estate planning attorney to help them create a special needs trust. The assets held in the trust for the disabled person won’t affect his or her eligibility for government benefits.
But remember, rather than naming a special needs child as the direct beneficiary of any asset, parents with a special needs trust for their child should name the trust the beneficiary. Parents can use their 401(k) or IRA funds as needed during retirement and any remaining funds will flow to their beneficiary only on their death.
There’s also a 529 ABLE account, which can hold up to $100,000 in assets without jeopardizing a special-needs adult’s eligibility for means-tested government benefits. Families are able to contribute up to the maximum gift exclusion each year.
At some point, parents themselves will need care—in addition to their child. Diminished capacity in aging parents can mean a need for outside help, which can be very costly. Parents should consider getting long-term care insurance coverage at age 50. That’s when they’re still healthy enough to pass medical underwriting but may no longer have large expenses like a home mortgage or college tuitions for other children.
Although expensive, long-term care policyholders can realize certain tax breaks. The IRS stipulates that qualified long-term care insurance premiums are an expense that can be funded through health savings accounts up to certain limits. Plus, long-term care expenses themselves can be paid out of an HSA, provided they meet certain criteria. HSAs offer other tax advantages. The money isn’t taxed when deposited but appreciates on a tax-deferred basis, and it can be withdrawn tax-free to pay for qualifying medical expenses now or in retirement.
One word of caution: using HSA funds for the purchase of durable medical equipment for a special needs child could mean that the equipment is considered an asset that belongs to the child, which could complicate eligibility for means-tested government benefits. Be careful when using HSA funds to pay for a dependent child’s medical needs. An elder law attorney will be able to guide you through these kinds of complex and confusing decisions to protect your child and your family.
Reference: MarketWatch (July 7, 2016) “Parents of special needs children plan for two futures”