By Heath Burch – CFPÂ®, ChSNCÂ®
The Special Needs Planning Center
Caring for a loved one with special needs can change the financial dynamic for a family, especially when you consider providing long-term support for your child. For many families, saving for retirement alone can be struggle, let alone supporting a â€œsecond retirement.â€
For families that have secured their own retirement, the focus turns to this: Do you project to have a large enough estate to also bypass social security, Medicaid and related services, effectively self-funding your loved oneâ€™s lifelong needs? While this wonâ€™t eliminate the need to draft a trust to coordinate future care for your loved one, it could provide you the flexibility to not create a supplemental needs trust and avoid the restrictions that can come along with it.
Self-funding your childâ€™s plan comes with risk. If youâ€™re thinking about doing it, though, these five steps can help you determine how much you may need to set aside:
Step 1: Identify fixed needs by building a projected budget.
If your child is already older than 18, this may prove an easier task because youâ€™ll have something to work off of. If not, youâ€™ll have to project future costs. Key expenses to consider are housing/residential costs, medical costs, personal needs/entertainment, transportation and personal assistance.
Step 2: Determine multipliers.
To project the future lump-sum value to fund these needs, youâ€™ll have to assume the number of years your child will need support. Youâ€™ll also want to take inflation into account, as the cost of what your child needs will continue to increase over time.
Step 3: Consider the â€œwhat-ifs.â€
You can only predict so much, so there will always be risk. But you can stress test your plan by planning for larger expenses. Plus, you can count on the unexpected, so provide an amount greater than what you know is needed. Some of these risks might be excessive medical costs, therapies or treatments not covered by Medicaid, the replacement of necessary items (an electric wheelchair or adaptive van replacement), a large market downturn or a reduction in interest rates.
Step 4: Determine how you will fund the trust.
In theory, any asset can go into a supplemental needs trust, but there are some that work better than others. This deserves comprehensive analysis with your financial advisor. In general, take non-qualified over qualified funds, liquid over illiquid assets and lump sums over income streams. If youâ€™re like many families and your wealth is consolidated in your home and IRAs/401(k)s donâ€™t despair, just understand how trustees may access the resources for your child.
Step 5: Donâ€™t forget the impact of taxes.
How much you leave in the trust and the benefit it can provide can be significantly impacted by the taxation on the assets. This relates to not only the potential impact of an asset being taxed at your passing, but also how that asset is taxed as it sits in the trust. Integrate a qualified tax professional into the planning process to help you understand the implications. This can allow you to direct certain assets to other beneficiaries and heirs, preserving more advantageous assets for the trust. And be sure to understand the impact of naming a non-person (for instance, a non-profit organization or religious institution) as a beneficiary, as it can influence the funds left for your loved one either by the taxation of the asset or requirement to distribute funds.
Bottom Line: Consider the Risk
To be clear, we donâ€™t often advise clients to elect to forgo the benefits of social security and other social services, but itâ€™s still a question we hear quite a bit.
When your estate is measured in the millions, you may have the freedom to self-fund the trust. But understand this option comes with risk. For instance, there may be a change in the extent of your childâ€™s needs, or a change in the planned use of the funds for the rest of the family. Unexpected costs can occur for anyone within the estate, with long-term medical costs potentially consuming significant funds. Changes in tax law can impact your ability to leave funds to heirs, or reduce the amount through taxation. Lawsuits can deplete funds, or other family members can develop needs previously unplanned for.
Ultimately, most should choose not to navigate this alone. Engage a special needs planner and estate planning attorney to help you consider all of your options, project your familyâ€™s needs with what you already know, develop a plan and then continue to adjust the plan as your situation changes.
Heath Burch, (CFPÂ® & ChSNCÂ®) is Vice President of the Special Needs Planning Center.