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Saving for the disabled
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October 25, 1999: 6:26 a.m. ET
Families of disabled children need special planning for future finances
By Staff Writer Shelly K. Schwartz
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NEW YORK (CNNfn) - Ann McDonnell, a long-time resident of Pound Ridge, N.Y., wasn't about to leave her kids in the lurch.
The single mother of three, two of them mentally retarded, had written a will and made some solid investment decisions over the years. But as her handicapped daughters reached their 30s, it became increasingly clear they were going to need more.
"Over the last 10 years, it has become obvious to me that the children were going to need some kind of additional financial help to provide for their lifetimes," said McDonnell.
Two years ago, she walked into her financial adviser's office and walked out with a solution.
McDonnell, 61, set up a life insurance policy that will roll over into a special needs trust fund for her disabled children upon her death. The funds ensure her kids will continue to receive all the government financial aid to which they're entitled -- plus have a little spending on the side.
"I sleep well at night," she says. "The special needs trusts are a godsend.
The basics
Some 14.7 million individuals -- both children and adults -- are living with disabilities in the United States today.
While many come from supportive homes, millions also face an uncertain financial future.
Research conducted by the financial services firm Merrill Lynch and several non-profit organizations reveals more than half the parents with physically and mentally challenged children are not planning ahead for the economic challenges their kids will face after they are gone.
"Merrill Lynch research has uncovered a wide gap between the financial needs and the financial preparedness of families of children with disabilities," said Christopher D. Sullivan, vice president and manager, Retired and Assistive Client Services. "This gap is often due to a lack of financial planning and advice on these issues."
Denial
It also stems from the fact that parents of disabled children don't generally have much money to plan with -- after footing the bill for the day-to-day living expenses of their child.
"It's a combination of factors," said Jackie Golden, a program manager for the National Parents Network on Disabilities. "Some are in denial. Some pray their child will die before they do. And others don't know who to trust."
To provide a little guidance, Merrill Lynch (MER) this month launched a new program targeted to help those parents.
The Families of Children with Disabilities program acts as a one-stop shop, offering parents a team of experts -- from financial planners to trust attorneys -- who can help them make educated decisions about their children's financial future.
Merrill's basic financial foundation report costs $250 and it covers everything all types of planning from taxes, to estate, to retirement. Once the report is complete, the company can then direct you to one of its legal experts also involved in the program who will assist clients in setting up a special needs trust -- if it's determined that's the most appropriate avenue.
Costs
These days, experts say financial planning for disabled family members has become paramount. That's because medical advancements and new therapy techniques over the last few decades have improved chances that the child will outlive the parent.
How much you need to save is the big unanswered question.
Ron Pearson, a certified financial planner in Virginia Beach, Va. and disability specialist, said the average disabled child requires about $30,000 to $50,000 a year to cover their living and medical expenses.
But that dollar figure can vary wildly depending on the range of services your child requires.
Golden, for example, said her 18-year-old son, Joshua, is severely disabled and requires 24-hour attention. His bills each year are closer to $95,000, most of which is picked up by the federal government.
"Even for middle-income and upper middle-income clients, when I tell them they are looking at sometimes half a million dollars or more they'll need to leave behind, they usually say they don't have it," Pearson said.
That's when the conversation turns to public assistance.
Social security and Medicaid
The two primary financial aid programs available to disabled individuals are Medicaid and the Supplemental Security Income program run by the Social Security Administration.
The government programs are designed to provide for the disabled throughout their lifetime -- covering all basic living and medical expenses. That's who picks up the tab if you fail to plan ahead.
The problem is, however, disabled individuals are ineligible to claim assistance under either program if they hold assets of more than $2,000 under their name.
Bumping them out
Parents and family members who purchase stocks and savings bonds under the disabled child's name, can therefore inadvertently knock that child - at least temporarily -- out of eligibility for financial aid.
"You'd be surprised how many families aren't aware of this, and they never realize that by giving they can do more harm than good," said Sullivan of Merrill Lynch. "The child basically has to spend down their money before they can become eligible for assistance again."
That means a child with $10,000 in assets under their name has to use up $8,000 of their own money to pay for basic living expenses -- which can go fast -- before they fall back into SSI and Medicaid eligibility. And sometimes, the re-enrollment process can leave a gap in cost of living coverage, experts say.
Pearson noted the assets that can bump your child out of eligibility also include secondary sources of income, such as pension plans and life insurance policies that name your children as the beneficiary.
"You have to remember to tell all your relatives not to pass money on under the child's name," Pearson said. "Anyone can blow up your plan."
Trusts
That's where the special needs trust comes in. For many families, this estate planning tool is the best method of passing on their assets to the child.
It isn't cheap -- legal fees for setting them up can run you $500 to $3,500 -- but for many, including McDonnell, it's the answer to a prayer.
"These trusts are the only way a handicapped person may accumulate money at all without losing government assistance," McDonnell said.
Basically, the money you squirrel away into a trust fund is held in the name of a third party -- a trustee -- who is charged with distributing the money to your child.
That way he or she is still able to collect Medicaid and SSI, and they'll be able to use your money for the little extras that those programs fail to cover -- including certain types of dental care and vacations.
"The money that goes into these trusts can be used to enhance the life of your child over and above Medicaid," Pearson said. "The trust may pay for a new bike or a trip to Disney World. Even a trip to Aunt Lucy's house."
If you can't swing the cost of setting up a special needs trust, you might want to look into a local community trust. These types of trusts, which can be found in most communities, are administered by a staff of volunteers and they often charge no fee for clients who wouldn't otherwise be able to afford the legal fees of a trust set-up.
Many, however, only accept as many clients as their volunteer staffs can handle.
An angel on their shoulder
Lastly, if you haven't done so already, Pearson said you should at the very least sit down and draw up a detailed letter of intent specifying all of your child's likes and dislikes, religious preferences and special care requirements.
The letter is one of the most important documents you can leave behind as it provides guidance for the appointed caregiver who will look after your child when you're gone. It can also spare your child a good deal of emotional distress.
Don't forget to give copies to your loved ones and the person who is most likely to act as the advocate or guardian of your disabled child.
"I won't even begin to work with a client until they have completed a letter of intent, which deals with your hopes and dreams for the child," Pearson said. "I tell the mom, who is often the one who writes it up, that they should write it as if they were an angel on the shoulder of the designated caregiver. She should include everything she would whisper in their ear."
The letter can be as detailed as you like and it should be updated every year as the needs and abilities of the child change.
"I have gotten everything from a one-page letter written in pencil to a 50-page computer generated masterpiece," Pearson said.
Peace of mind
Experts say the most important thing to remember about financial planning for disabled children is to begin the process early.
Doing so will not only yield a larger trust funds, but bring peace of mind to your life.
"I am relieved because I know that no matter what I do, those kids are taken care of," McDonnell acknowledged. "That's very important."
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