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Factoring a Child with Disabilities Into Financial Plans

With more than 4 percent of American children having a disability, millions of parents find themselves facing unexpected expenses related to their child’s special needs. There are so many therapies, medications and doctor visits, with endless co-pays and other costs to cover. You might need to renovate your home and upgrade your car to make them more accessible. There’s no telling how much financial support a child with disabilities will need later on in life. And disability insurance, while critically important for disabled adults, probably isn’t going to help you with services for your child with disabilities. 

There are a lot of ways that parents of children with disabilities can adjust their financial plans to create adequate safety nets for kids’ future care. Because your family’s unique situation will determine the kind of protection you need to put in place, making specific plans requires a conversation (or series of conversations) between you and your advisors. Some of the topics that these parents might discuss with their financial advisors include:

Creating trusts. Using a special needs trust is a common technique for parents to earmark funds for the needs of a child with disabilities. It’s important to work with knowledgeable financial advisors to create trusts for disabled kids due to the complexities involved. If the child ever needs to qualify for government benefits, as many disabled people do, they may have to prove that they have limited resources. Holding assets in a special needs trust keeps them out of the child’s control, and as such shouldn’t affect their eligibility to receive benefits. Money from the trust can be used to pay for any number of expenses related to a disabled person’s lifelong care.

Insurance. Financial planners often recommend that new parents buy life insurance, just in case. Having adequate life insurance is especially important when you’re responsible for a child with disabilities. A life insurance payout can partially replace your income if you die or are incapacitated. Or, if you’re a primary caretaker for your child, a life insurance payout can help cover the cost of hiring professional caretakers. 

Long-term care insurance is also something that you’ll want to discuss with your advisors. If you and/or your spouse ever need long-term care in a nursing home, you may have to choose between paying out-of-pocket or spending down all your assets to qualify for Medicare coverage. Either way, your savings will be negatively impacted. LTC insurance lets you afford the care you need, while preserving assets for the ongoing care for your child with disabilities.

One thing you probably don’t have to worry about is disability insurance. It’s designed to replace a disabled adult’s income rather than support a child with disabilities, and you’re probably already covered by it. Generally when people talk about disability insurance, they’re referring to the Social Security Disability Insurance (SSDI) program. SSDI pays monthly benefits to workers who become too disabled to work, assuming they paid Social Security taxes on their earnings before becoming disabled and they meet other criteria. 

Some workers also buy supplemental disability insurance policies from private insurers to replace their income if they’re ever too sick or injured to work. Buying additional disability insurance to cover yourself is something you may want to discuss with your advisors, but you don’t have to do it just because you have a child with disabilities. 

ABLE accounts. The Achieving a Better Life Experience (ABLE) Act of 2014 created a tax-advantaged way for parents to save money for children with disabilities, without affecting their ability to qualify for government benefits. The maximum annual contribution amount is the same as the gift tax threshold ($16,000, for 2022), and anyone can contribute to a child’s ABLE account. Earnings in the account grow tax-free and distributions are tax-free when they’re used for qualified disability expenses. Qualified expenses include a broad range of things, including costs related to the beneficiary’s education, housing, personal support and transportation needs. If there’s already a 529 account in the child’s name, any money in that account can be rolled into an ABLE account without penalties. 

Beneficiary Designation on Retirement Accounts. There are many provisions within the tax code that specifically relate to people with disabilities. As you may know, recent legislation significantly reduced the timeframe for emptying an inherited IRA account (for example) from lifetime to 10 years.  Withdrawals from inherited IRA accounts are taxable in the year they are withdrawn, meaning the full account value will be taxed within 10 years of your death. An exception to this rule relates to disabled beneficiaries. Provided that this fits within your estate distribution goals, a person with disabilities can empty the inherited IRA account over their lifetimes, providing the maximum amount of time for the account to continue to grow on a tax-deferred basis. Any assets remaining in the inherited IRA account upon the demise of the child with disabilities can be left to his or her siblings, who would then be subject to the 10 year withdrawal rule. 

Budget and investment adjustments. Naturally, contributing to ABLE accounts, funding a trust and making monthly premium payments for your insurance policies is going to affect the rest of your financial picture. Speak to your financial advisors about the most advantaged ways to move money around so you’re balancing the needs of your child with disabilities with your own retirement plans and the financial needs of the rest of your family.

Sachetta, LLC’s team of advisors work with parents to create the estate plans and financial plans that are tailored to their specific family’s needs. We’ll help you create the protections that will support your child with disabilities no matter what their future holds. Contact us today. 

As Senior Wealth Manager, Jeffrey R. Aron, CFP®, MSFP manages all aspects of Financial Planning and client services, including the preparation of comprehensive financial plans (retirement, education, cash flow, etc.), insurance and asset allocation recommendations, advanced estate planning strategies and of course, plan implementation.