Taking care of a special needs child can be very challenging. After juggling medical appointments, educational plans, behavioral assessments, occupational, physical, or speech therapy, parents often have little time or energy to address the financial implications of raising a special needs child. However, the financial implications are huge. One study by the Department of Agriculture suggests that a middle-income family will spend approximately $234,000 to raise a child until age 18.1 That number increases dramatically when raising a special needs child. As the term “special needs” covers many conditions, ranging from mild learning disabilities to severe cognitive, physical or behavioral impairments, the additional costs vary widely and can be difficult to estimate. According to Autism Speaks, the average lifetime cost of caring for an autistic person is $1.4 million. If the person with autism also suffers from an intellectual disability (as 1 in 5 do), the cost balloons to $2.3 million.2
So what are some financial planning areas that families with special needs children should be considering?
For many families, life insurance is a temporary need that can be satisfied with low cost term insurance. Wage earners need life insurance to protect survivors who are dependent on their income and resources. But what if your child will always be dependent on you financially? In these cases, a permanent life insurance policy might be needed. A permanent life insurance policy covers your entire life and will provide a death benefit to ensure your special needs child will be financially taken care of after you are no longer here.
If you have life insurance, your special needs child probably shouldn’t be listed as the beneficiary. This is true for any account with a beneficiary designation, such as 401(k) plans and IRA accounts. Millions of disabled individuals and their families depend on public programs like Supplemental Security Income (SSI) and Medicaid for income, health care and housing assistance. To qualify for these programs, a disabled person cannot own more than $2,000 in assets. If the special needs child receives any assets directly, either through beneficiary designations or through a Last Will and Testament, they risk losing their public benefits.
So how should one give assets or leave assets to a special needs child? A Special Needs Trust can be set up with the child as the beneficiary of the trust. The trust holds and manages the assets for the disabled individual. It allows the special needs child to use and enjoy the assets in the trust, without affecting eligibility for public benefits.
Although they can be a great planning tool, Special Needs Trusts can be complicated and expensive to draft. In 2014, ABLE (Achieving a Better Life Experience) accounts were introduced. Like Special Needs Trusts, they allow for asset accumulation (up to $100,000) for a special needs individual without compromising eligibility for public programs.
ABLE accounts are tax-advantaged savings accounts for individuals with disabilities. The account works similarly to a 529 college savings plan. The account can be funded with up to $14,000 per year. There is not a federal income tax deduction for the contributions, although some states allow a state income tax deduction. The money grows tax-free if used for “qualified disability expenses”, including housing, transportation, special education services, tutoring, assistive technology, job training, health, financial management and legal fees. If withdrawn for expenses other than a qualified disability expense, the earnings are taxed and subject to a 10% penalty tax.
The account beneficiary must be an individual who became disabled before age 26. Anyone who qualifies for Social Security disability payments or Supplemental Security Income automatically qualifies. If you are not receiving either, but meet Social Security’s definition of significant functional limitations and submit a certification letter from a licensed physician, you can also qualify.
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