How to use retirement tools to pay for a disabled child’s future

For the parents of a severely disabled child, one financial challenge outweighs all others: ensuring that the child is cared for long after the parents are no longer there to help.

That alone is hard enough, but it adds another conundrum: how to pass on enough savings without starving the child from government benefits.

James Lange, a real estate attorney and chartered accountant, knows the dilemma well. When his daughter Erica was 17, she was diagnosed with dysautonomia, a nervous system disorder that affects her breathing, heartbeat and other important functions.

“One day Erica passed her SAT, and two days later she got so sick she had to drop out of school,” Lange said.

Despite her intelligence, Erica will never be able to keep a job, her father said. This made him and his wife Cindy very concerned about their child’s future – and they are far from alone. According to the US Centers for Disease Control and Prevention, 26% of American adults have some type of disability, and 6.8% are unable to live independently because of it. The lucky ones have elderly relatives trying to fund their future – but they could use some help from advisors.

“It’s the most important thing your customer thinks about,” Lange said. “Don’t talk about whether they should buy AT&T or IBM if that’s not the problem for them. The question for them is, ‘What will happen to my child when I die?’”

threading the needle
Tammy Wener, CFP at RW Financial Planning in Lincolnshire, Illinois, has asked this question many times. Wener said she’s worked with about 10 families who have children or other relatives with special needs in the past year alone – and that number has been increasing.

Of course, such clients usually want to leave their descendants as much money as possible, but if they leave too much, the person could not be eligible for Social Security Income (SSI) and other public benefits, which can be crucial resources.

“It’s so important for families to understand how to structure savings in a way that doesn’t exclude people with special needs from accessing government programs,” Werner said. “I have seen many situations where the person with special needs has lost important government benefits due to an inadvertently poorly planned inheritance.”

To thread that needle, Werner recommends something called a Special Needs Trust — also known as a Supplemental Needs Trust. Since the inheritance is technically left to the trust – not the person – the same wealth limits do not apply.

“If the trust is properly set up and administered for government purposes, it qualifies as a tax-exempt asset,” Werner said.

Lange did this for his daughter — with a twist. Most of the trust’s underlying assets are pension plans. He and his wife have decades of savings invested in several converted Roth individual retirement accounts and a Roth 401(k), all of which are trusted by Erica and allow her to make regular payouts well into the future.

The Langes also took other steps. Most importantly, they won a “grueling legal marathon” to have Erica classified as disabled by the Social Security Administration. This ensured that she was eligible for both Social Security disability insurance and Medicare. It also had another benefit: Under the SECURE Act 2019, a non-spousal beneficiary must withdraw all funds from an inherited IRA, typically within 10 years. However, because Erica qualifies as an “eligible named beneficiary” due to her disability, she can roll over those payouts throughout her lifetime.

All of those efforts, Lange said, contributed $1.9 million to Erica’s projected earnings.

“She won’t have to worry about money, and now neither Cindy nor I are worried about her financial security when we’re gone,” he said.

Get the right help
As Werner pointed out, these methods only work if the trust is properly designed and administered, which is extremely difficult to enforce. To do this, she encourages advisors to speak to an expert before diving into the topic with a client.

“It can be a tricky area with a lot of parts that need to work together,” Werner said. “I would therefore recommend reaching out to someone in the financial planning community who is knowledgeable on this topic.”

There are also online resources. Werner recommends a website called Special Needs Answers where lawyers and financial planners offer advice on the subject. There’s also the ABLE National Resource Center, which provides information on ABLE accounts – another option for families looking to build savings for a disabled relative.

And to top it off, Lange himself co-authored a report available online explaining what he and his wife did to secure Erica’s future. The document provides detailed tips for other special needs families that Lange believes can achieve similar results. According to his calculations, someone with a $500,000 IRA could use his strategies to generate an additional $239,000 in savings.

Werner gives the advisors one more piece of advice: When caring for a disabled child, don’t forget to pay attention to the parents as well.

“It’s always about making sure that the parents are also in a good financial position,” said Werner. “Really, it’s planning for retirement for three people instead of two.”

This type of planning is extremely hard and complicated work, but at least one family says it’s worth the effort. Today, Erica Lange is 27, and her father said securing her financial future – even though it has taken years of struggle – is a “huge relief”.

“It was life-changing,” Lange said. “The fear that once kept us up at night is gone now.”

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