Personal Finances

Financial Planning Issues for Children with Special Needs

Providing for children with special needs has become more complicated than ever. Unlike in days past, modern health care now routinely allows a large majority of those who experience disabilities to outlive their parents.

The dilemma

This is good news, of course, but it presents a dilemma to many of these parents. They recognize that our aging population is relentlessly increasing the budgetary pressure on public assistance in all forms. Yet their children, like most Americans with disabilities, rely on federal and/or state payments and programs to meet the challenges of everyday life.

Many public services may require that a financial means test be taken in order to qualify for benefits. Consider the child’s ability to manage money.

The means test

While most parents with the means will want to provide for their children’s needs now and in the future, the future becomes problematic for children with special needs since many public services may require that a financial means test be taken in order to qualify for benefits. If a child with special needs has "too many assets or too much income," he or she may have to spend down those assets on private services before passing the financial means test. This could lead to impoverishment. Furthermore, if "free" public services are later cut back or discontinued entirely, then the child could be left impoverished without his or her own means to obtain the special services needed.

For this reason, extra care must be taken when selecting how investments and savings are going to be owned and viewed by financial means testing. Assets owned outright by a child or parents are first considered available by financial means tests. Assets held in certain trusts or in life insurance cash values are usually excluded from means testing. However, if such assets later become the child’s property or income, then they fall under means test scrutiny.

Options to the means test

While most states require parents to meet specific requirements to qualify for services, many are either "entitlement" states or provide income and asset "waivers" for special needs families.

States that entitle individuals with disabilities to benefits will exclude parent income and assets to provide Medicaid and early periodic intervention and screening. Upon diagnosis, infants and children may begin receiving medical, therapeutic, behavioral and palliative care intervention in their home setting, with cost subsidized by the state. Care is defined by medical necessity, and may continue until the child has progressed to meet or exceed goals and objectives set forth by their medical team.

States that provide "waivers" will allow parents to waive their income and assets and receive medical, therapeutic, behavioral and palliative care intervention in their home setting. Services are provided by a combination of Medicaid and state funds. Infants and children may retain their waiver services until the child has progressed to meet or exceed waiver definitions of disability. It is important to note waiver definitions are often more stringent than the child Security Supplemental Income (SSI) definition and include an appeals process for denial of services. Many states have a lengthy waiting period, and it is important to apply for waiver services as soon as the child is diagnosed.

If Medicaid is provided through state waiver or entitlement, many states will reimburse a portion of the family’s monthly health insurance premium. This allows the child to keep his or her parent’s private health insurance while utilizing Medicaid as secondary insurance.

Accessing education

When their child turns 3, parents should meet with their local assigned school to begin addressing services available under the Individuals with Disabilities Education Act (IDEA) and Early Periodic Screening. This may include specialized instruction in the child’s current pre-school, or at his or her home school, to address speech and language, physical therapy, learning differences and socialization. Addressing these areas often includes the development of an Individualized Education Plan. Parents may also have access to state funds in the form of Educational Savings Accounts, Tax Credits and other grants to utilize state funds to attend private a K-12 school that offers specialized programs for children with an Individualized Education Plan. These programs are not based on parental income or assets.

Many colleges are embracing secondary education options for students’ intellectual disabilities, and offer certificate programs. If your child is the beneficiary of a 529 plan, there are specific rules to be aware of when distributing the 529 for secondary education.

Accessing SSI

Supplemental Security Income is dependent on the parent’s income and assets prior to the child’s 18th birthday. In the month following the child’s 18th birthday, he may apply to SSI based on his income and assets, even while he is living at home and attending school. Once SSI is awarded, Medicaid is awarded in tandem in most states. If the child is on a waiting list for the state’s waiver services, the child may be able to access a portion of the waiver services by utilizing his Medicaid benefits.

The role of life insurance

When set up correctly, cash value life insurance (whole life, universal life and variable life insurance) might provide a good funding vehicle to provide cash for short-term needs and a legacy that can be sheltered from means testing in a special-needs trust. However, you need to compare policies, benefits, costs and investment choices to find the right balance for your financial needs and to avoid adverse income tax consequences.

It is important to evaluate permanent life insurance policies for your infant or child. These policies are generally for small face amounts, such as $50,000 or less. If a policy’s cash value exceeds $1,500, the cash value will count as the child’s asset and disqualify the child for means-based testing. Some policies may be irrevocably assigned to a trust to remove the asset from the child’s assets.

Name a guardian

While special-needs children are young, it is important to provide for guardianship in the event of the untimely death of the parents. This is accomplished by naming guardians for children in the parents’ wills. Careful consideration must be given to who should serve as guardian, and, of course, this should be discussed with potential guardians before their inclusion in a will. You may also want to provide means for your selected guardian to care for your child. Life insurance and/or a trust should be considered for this purpose.

Maintaining eligibility for government assistance is an essential, overarching principle in all financial and estate planning for families with disabled or special-needs children. But this critical consideration should not obscure other decisions. Since disabled individuals increasingly have normal life expectancies, parents want to ensure that good care of their special-needs children will continue after they are not here to provide it themselves.

It is important to remember your child will become his own guardian at age 18. It may be beneficial to consult with an attorney when your child reaches age 17 to discuss full guardianship, limited guardianship or power of attorney for your child. How well does your child handle money?

When bequeathing assets to special-needs children from property, investments or insurance proceeds, consider the child’s ability to manage money as well as the effect the inheritance will have on the financial means testing to qualify for public services. It is often better to create a supplemental needs trust to avoid problems. The word "supplement" is the key concept in understanding this estate-planning and financial-planning tool, which is also called the "special-needs trust." Since the trust document requires the trustee to use trust funds only to enhance the beneficiary’s quality of life by supplementing—not replacing—whatever minimal, means-based benefits are provided by federal and state agencies, its value is excluded from means testing.