The cost of paying for special needs care depends on the type and intensity of each individual’s condition. Planning for care, including the use of Special Needs Trusts, can help families manage costs and plan for the future.
The financial needs of a loved one with special needs can be staggering for a family. According to the organization Autism Speaks, a lifetime of support for an autistic child can reach more than $2.3 million.
If you have a family member affected by a disability, what is your plan to pay for this care? This was the issue explored in a recent Financial Planning article, “A new special needs planning approach under the tax overhaul.”
Families usually want to plan for disabled relatives, but can be wary of losing access to savings, fearing that they may need the money themselves. A caretaker must also weigh the individual’s needs against the family’s other financial goals and obligations.
Planning for people with special needs often involved irrevocable trust strategies in the past. Trusts can benefit the person with special needs, but other family members had limited access to the investments. The lifetime estate tax exemption is doubled under the tax overhaul, so most Americans do not face a federal estate tax. The change in the tax law and higher exemptions have made it possible for people to plan for the loved one’s care, while ensuring protection for the family.
1. Estimate the cost of caring for a family member with special needs. A good plan should preserve eligibility for government benefits, such as Medicaid and SSI. However, it is important to note that many expenses are not covered. This plan must also state who will care for the disabled person, if the primary caregiver dies or is incapacitated.
2. Decide how to fund the plan. Families frequently use a permanent life insurance policy to help cover any gaps left by limited government aid. The death benefit, which is generally income tax-free, provides money to help replace caregiver services, add to benefits provided under government programs and provide a liquidity source to help equalize the inheritance for other family members.
When the federal estate tax exemption was lower, a parent or caregiver usually would create an irrevocable third-party special needs trust during their lifetime. The trust assets would be used to purchase a life insurance policy, with the trust made owner and beneficiary. At the insured’s death, the death benefit received by the trust would be excluded from the grantor’s estate for estate taxes. The policy distributions would provide ongoing care for the relative, while allowing for access to government benefits.
However, the new higher exemptions have made it possible to plan for a loved one with special needs and also protect the entire family. This can be done by a caretaker personally owning a life insurance policy on his/her life that names a special needs trust as the beneficiary.
3. Work with an attorney experienced in Special Needs planning. This type of planning really does require a professional team, including a Special Needs attorney who understands the interplay between government programs and family asset ownership.
Reference: Financial Planning (January 15, 2019) “A new special needs planning approach under the tax overhaul”