Brian Waldron, 42, is the father of five children under 8. His 3-year-old son, Wesley, has Down Syndrome.
"The first six months was really getting over a lot of health stuff," the Omaha, Neb., father said, as he detailed the heart and lung issues that kept Wesley in the hospital and on oxygen.
In a whole range of ways, what Waldron -- and the millions of Americans facing similar challenges -- went through during that first half-year with Wesley was just the tip of the iceberg. And while it's natural under such circumstances for parents to focus on children's emotional challenges and their developmental needs, it's vital to put some serious thought into financial planning, too.
Some 20 million U.S. families face the struggles of raising a child with disabilities, and the number continues to rise. Tackling the financial side can be overwhelming. For example, it will cost an estimated $3.2 million to take care of a child with autism over his lifetime.
Recognizing these exorbitant costs, parents like Waldron may be tempted to set aside assets in the names of their special-needs children, or to name them as beneficiaries in wills or insurance policies. But that can be a costly mistake.
Special Needs Trusts
"When financial planning for a person with a disability, you have to be cautious of disqualifying them from government programs," warns Joanne Gruszkos, director of MassMutual's SpecialCares program. If a special-needs child is the beneficiary of a parent's life insurance or 401(k) plan, certain restrictions around Medicaid, Medicare or other federal programs could prevent that child from receiving government benefits to pay for his care.
Likewise, it's important to avoid having assets flow directly to children, which could also make them ineligible for benefits.
Instead, the most effective strategy hinges on what are called Special Needs Trusts.
Waldron and his wife have such a trust, funded with a whole life insurance policy and other assets, and they're designing a plan to incorporate their other children. It's arranged so that the money from the life insurance policy and the 401(k) meant for Wesley goes instead into the trust. That way, he will have access to enough for his needs, but not so much that he will be prevented from receiving government-funded health care.
Planning for retirement is different now too, Waldron said.
"The realization that we will never have an empty nest was significant," Waldron said. "We had to change our whole strategy. [Wesley] is going to live with us for the rest of our lives."
Families like the Waldrons would do well to follow the guidance of MassMutual's Special Care division as they make their plans. Here are half a dozen of its recommendations:
1. Create A Letter of Intent: Gather all the information about the special needs family member together in a letter of intent. It's not a legally binding document, but it can give courts and trustees a better understanding of what you feel is best for your child. Outline such details as medical history, preferred care and living arrangements, and whom you'd like to get guardianship after you're gone.
2. Get a Special Care Planner: No one should have to wade through the complex process of special needs planning alone. A planner will work with lawyers, accountants and caregivers to help you figure out the best financial and health strategy.
3. Create a Supplement Special Needs Trust: This type of trust allows you to allocate funds for the care of a special needs child without leaving him excluded from federal aid. If a special needs individual has listed assets of just $2,000 or more directly in his name, his ability to qualify for government programs can be jeopardized. Money in an SSNT doesn't count toward that $2,000 limit.
4. Make Sure Your Will Funds the SSNT, Not the Child: A valid will is a must for parents of special needs children. Without one, laws in many states will, by default, make each of your children an heir to part of your estate -- which is exactly what you want to avoid, if a child is to stay eligible for the federal programs he'll need. Both parents should therefore have their wills and other documents written such that the SSNT is the beneficiary of the special needs child's portion of the estate.
5. File for Legal Guardianship: Parents don't remain legal guardians of their special needs children forever, unless they take action to do so. At either 18 or 21, depending on the state, parents must apply through the courts to be legal guardians. It may look like a mere formality, but it's important.
6. Learn About All The Possible Help Available: A special needs child can receive benefits from Medicaid, Medicare, the State Children's Health Insurance Program (SCHIP) or the Children with Special Health Care Needs (CSHCN) provision of the Social Security Act.
For more information, read the full document: 10 Common Questions About Special Needs Life Care Planning.