As the life expectancy of disabled adults increases, it’s increasingly complicating one issue for their aging parents: retirement planning.
Having a special needs child adds complexity to retirement planning. Parents must pay attention to minute but critical details—like beneficiary designations for their workplace 401(k)—while trying to save as much as possible for their own retirement and at the same time trying to ensure that their child will have care after they’re gone.
A recent MarketWatch article, “Parents of special needs children plan for two futures,” says that you’re basically planning for two lifetimes. In 2030, there will be approximately 1.2 million adults age 60 and older in the U.S. with developmental disabilities. That’s about twice as many of the 642,000 who fit that profile in 2000, according to 2012 research by the University of Illinois at Chicago. Also, according to the National Down Syndrome Society, today people with Down syndrome have a life expectancy of 60, compared with just 25 in 1983.
It’s critical that parents make certain that any savings and investments won’t disqualify their child from means-tested government benefits, which can impact the parents’ ability to save for retirement. To avoid this, parents should ask an elder law or estate planning attorney to help them create a special needs trust. The assets held in the trust for the disabled person won’t affect his or her eligibility for government benefits.
But remember, rather than naming a special needs child as the direct beneficiary of any asset, parents with a special needs trust for their child should name the trust the beneficiary. Parents can use their 401(k) or IRA funds as needed during retirement and any remaining funds will flow to their beneficiary only on their death.
There’s also a 529 ABLE account, which can hold up to $100,000 in assets without jeopardizing a special-needs adult’s eligibility for means-tested government benefits. Families are able to contribute up to the maximum gift exclusion each year.
At some point, parents themselves will need care—in addition to their child. Diminished capacity in aging parents can mean a need for outside help, which can be very costly. Parents should consider getting long-term care insurance coverage at age 50. That’s when they’re still healthy enough to pass medical underwriting but may no longer have large expenses like a home mortgage or college tuitions for other children.
Although expensive, long-term care policyholders can realize certain tax breaks. The IRS stipulates that qualified long-term care insurance premiums are an expense that can be funded through health savings accounts up to certain limits. Plus, long-term care expenses themselves can be paid out of an HSA, provided they meet certain criteria. HSAs offer other tax advantages. The money isn’t taxed when deposited but appreciates on a tax-deferred basis, and it can be withdrawn tax-free to pay for qualifying medical expenses now or in retirement.
The best way to ensure your financial decisions will not negatively impact your child’s eligibility for means-tested benefits is to work with an experienced elder law attorney.
Reference: MarketWatch (July 7, 2016) “Parents of special needs children plan for two futures”