If you don’t know of a client in your practice who needs help planning for a beneficiary with special needs, chances are you’re not asking the right questions. And supporting clients seeking to transfer wealth to affected family members requires special tools, because the wrong tactic, even supported by the best intention, can leave a special-needs beneficiary lacking essential funding, benefits or services.
One in four American adults lives with a disability that hinders a major life activity, according to the Centers for Disease Control and Prevention, which means that chances are good a decent segment of every advisor’s clients are affected.
But experts say that this type of planning requires special tools that advisors may not have used commonly, if at all. And so it’s important for advisors to understand the potential hazards, where they may be encountered and how they can be avoided.
The best starting point, experts say, is a practice every advisor is already utilizing: getting to know the client.
“I think in many cases it goes undiscussed,” said Cynthia Haddad, a partner at Special Needs Financial Planning, based in Burlington, Massachusetts. “I know many financial planners that they’ve worked with clients for many years, then they find out that their son has mental illness. Many times, it’s not until the death of a parent or something happens, some change, that … all of a sudden that they find out.”
To avoid surprises, it is good practice to ask clients about each potential beneficiary in a wealth-transfer plan. “It’s important to ask, ‘Tell me about the individual,’” said Andrew Komarow, founder of Planning Across the Spectrum, based in Farmington, Connecticut. “Somebody with autism could be somebody who can’t speak and needs 24/7 support, and they can also be Elon Musk … or myself,” notes Komarow, who, like Musk, has received an autism diagnosis.
Understanding the circumstances of each beneficiary can affect decisions about investment vehicles and other portfolio choices. “Just because you want to help the family doesn’t mean you’re in the position to help the family properly,” adds Haddad, who has a developmentally disabled sibling.
One big consideration is how various products may impact government benefits to which a client’s child or grandchild, for example, may be entitled.
“Advisors get very excited, and they’ll come to me and say, ‘I had a family that had a kid with Down syndrome. … I made sure the parents got some life insurance, and I named the child as the beneficiary.’ The first thing they just did was just disqualify that child for future eligibility for government benefits,” she says.
Haddad’s benefits-busting scenario is the most commonly cited challenge advisors face. It underscores the importance of understanding which government-funded benefits are income- or asset-tested. Life insurance going directly to a special-needs beneficiary would almost certainly disqualify that person from government-funded benefits. A 529 college savings plan could also be a disqualifier, and even a joint savings account could pose problems, experts say. Likewise, an improperly named trust could also create a disqualifying revenue source, which is why advisors with experience in the space say it’s important to have an attorney craft any trust. “Make sure that it’s an attorney that specializes in this area. A certified elder-law attorney,” Komarow said.
Even if government-funded benefits may not seem absolutely essential, particularly if the special-needs beneficiary does not have an extraordinary disability or will have strong financial support, it’s still unwise to do anything that extinguishes those benefits, experts note. Many of those benefits are funded by Medicaid and provide relief and assistance not easily obtained otherwise, they add.
“That’s how the individual might get a job coach. Or if they are in a group home,” says Alexandria Dunn, also a partner at Special Needs Financial Planning. Often clients and their advisors don’t think about where funding for services they receive come from, she added.
“If they’re not eligible for Medicaid, they’re not going to be able to receive these types of residential waivers, services, transportation … day programming,” said Dunn, who also has a special-needs sibling.
Key to ensuring Medicaid access is another process that may not be common ground for many advisors: approval for Social Security’s Supplemental Security Income program and Social Security Disability Insurance.
According to the Social Security Administration, 35 states automatically tie Medicaid to SSI. And SSI, in turn, may later qualify the recipient for Disabled Adult Child benefits, drawn off a retired parent’s Social Security. But SSI and SSDI approval are not easily obtained.
“The key part, for SSI, is most of these are turned down,” says Jim Lange, founder of Pittsburgh-based Lange Financial Group. Lange, who has a special-needs daughter, adds that “the appeal process is very difficult, so you really want to get that right in the first place. In our case … it took the better part of a year, a couple of hours a day, of my wife putting together a case of why my daughter is disabled and why my daughter will never work.”
Komarow says he always suggests applying by the age of 18, before the special-needs beneficiary has established any kind of work history, even a failed one. And for Disabled Adult Child purposes, “it’s important to establish that the disability was prior to 22,” Komarow adds.
Other potential pitfalls of these types of wealth-transfer scenarios include choosing an inappropriate trustee, not involving other family members in the planning process, failing to maintain flexibility in a financial plan, and not effectively using Roth IRA conversions to provide lifelong income to a special-needs beneficiary.
“Let’s say you have a client with a couple of million dollars and you miss Roth conversions. As a result, instead of the kids being $300,000 or $400,000 better off, they’re just well off,” Lange warns.
The key, advisors experienced in the area say, is to listen to the client’s needs and be sensitive to their circumstances.
“You really have to take the lead from the client. Emotionally, where are they?” said John Nadworny, also a Special Needs Financial Planning partner and the father of a son with Down syndrome. “Are they ready to plan? If they’re not really ready to do a comprehensive plan, at least with someone young, say, ‘Buy some term insurance, get a special needs trust, and I’ll be back in a year when you’re really ready. In the meantime, build an emergency reserve, and here’s the name of a lawyer.’
“Then you’ll get a client for a lifetime, rather than a superficial sale,” Nadworny adds.