My financial planning practice focuses on families that include dependent adults with disabilities. These families often plan and save very well because they are afraid of what life will be like for their loved one when the parents or siblings are gone. Yet, families often seek out advisors for their retirement planning, investment management and insurance needs with mixed results. Well-meaning advisors may glance over important steps in the planning process or follow general best practices that, unbeknownst to them, can have long-term negative effects on the financial future of their client’s beneficiary.
Here are a few of the most common mistakes I have seen and encourage you to be aware of in your practice:
1. Not confirming the estate plan and beneficiary designations for clients and their older family members
Confirming the beneficiaries of a client is a best practice of a comprehensive financial plan. However, I feel it is necessary to outline the importance of checking and triple checking all beneficiary designations for a Medicaid-eligible beneficiary.
Medicaid is an asset-tested benefit that provides more than just health insurance for low-income individuals. In many states, Medicaid also covers substantial care and employment support for children and adults with disabilities. These supports allow them to live more freely in the community as opposed to a more institutionalized life. States may provide Medicaid beneficiaries with benefits that add up to tens of thousands of dollars in real costs.
Each state has its own asset rules that beneficiaries must follow, but the long-used standard has been that they cannot own or control assets beyond a limited dollar amount — often close to $2,000. Nationally, a beneficiary can own their own home and one car for personal use, but most other assets count toward the Medicaid limit. A special needs trust (also called a supplemental needs trust) is the planning tool most typically used to allow people with disabilities to have additional financial support without sacrificing their Medicaid benefits.
A third-party special needs trust allows parents or other family members to name their loved one in an estate plan. Funds placed in trust are controlled forever by someone other than the beneficiary for the beneficiary’s sole use. Distributions from the trust are required to follow Medicaid law. State laws include specific requirements for maintaining Medicaid-protected status. Every special needs trust will declare that assets are available to the trustee to supplement but not replace the benefits the government is able to provide the beneficiary through standard programs. These programs include Social Security income, Medicaid, Medicare, Section 8 housing vouchers and food stamps.
If a Medicaid beneficiary were to inherit assets from a deceased family member or friend, they could lose their necessary Medicare benefits if they don’t have a special needs trust set up for that inheritance. First-party trusts are funded with money that belongs to the individual, which is often inherited or received through a court settlement. In contrast, a third-party special needs trust contains money given to them in trust by someone else (a third party).
First- and third-party trusts follow different rules. Most notably, the assets in a first-party trust are available to pay back any Medicaid program used by the beneficiary during their lifetime. In contrast, the assets in a third-party trust do not need to be repaid because they were never owned by the beneficiary of the trust.
Advisors must review estate plans and beneficiary designations with their clients to ensure that their estate plan does not name a family member with a disability outright which could cause costly problems down the line. Keeping control within the family by creating a third-party trust allows the family to also name beneficiaries beyond the original person with the disability.
But we can’t stop there as advisors. We must encourage our clients to make sure they’re openly communicating their estate plan and tools with other family members who may intend to leave small or large amounts to the person with the disability, which may jeopardize Medicaid benefits.
Mistakes can and do happen, and sometimes people die during drafting of documents or before being able to put plans into place. If that happens, make sure to talk quickly with an attorney who is well versed in Medicaid law in the state the beneficiary is receiving the money. The attorney should be able to help get tools in place quickly to minimize the loss of support by the individual with a disability.
Some individuals with disabilities use Medicaid coverage to live in supported housing. If that’s the case, a gap in coverage may meant that they lose their placement in a home that they may waited years to get in. While most houses will not move an individual out in this case, the risks are getting higher amid more for-profit homes and low-staffed homes that rely on Medicaid reimbursements to meet their bottom line. This is absolutely a crisis moment that advisors should plan around and it should be the top priority when meeting with a special needs family.
2. Recommending the wrong life insurance at the wrong time
Most of what we learn in our education around special needs planning is how to fund a special needs trust with life insurance. Permanent life insurance is absolutely part of many sound plans. The huge “but” is that it must make sense within the overall plan. I have spoken time and time again with families who’ve told me about financial advisors who, immediately following an intake questionnaire, offered them highest amount of life insurance they could afford. But before calculating life insurance quotes, many things need to be true.
First, a client should be made aware that they are not required to fund all of the future financial needs of their loved one utilizing benefits. The dollar amount of insurance need is very often overshot based on the future income and expenses of the individual utilizing Medicaid services. Parents often frame their own expenses and lifestyle when thinking about their child’s future financial needs. Going through the reality of the person with the disability is helpful to ease some of the unnecessary fear that there won’t be enough for that individual to live comfortably.
We also want to look at the financial reality of the family members purchasing the insurance policy. How old are they? How many years are they still planning to be employed? Do they have work coverage? Is there other term coverage? Do they have disability coverage on top of any other held insurance?
A young person putting $15,000 to $30,000 away into a life insurance policy usually does not make good financial sense when there are other goals to meet first. Many families with young children are still looking at the following goals before they look to fund a trust:
- Meeting substantial out-of-pocket medical and educational expenses for younger children with disabilities.
- Funding college savings plans for other minor children.
- Maximizing savings into retirement plants.
Term insurance may be more appropriate
Clients often risk putting their children’s needs ahead of their own personal planning. They are led to believe that they can never retire and never die, based on fears fed to them by others. Permanent life insurance has the potential to make the right plan work and to allow some families to feel comfortable spending in their own retirement. But for families still in the early planning stages of their lives, term policies are often sufficient and more appropriate.
Clients in their 20s, 30s and 40s should be counseled to use more typical planning tools before going to the more specialized tools of permanent life insurance. Permanent life insurance for a special needs plan is appropriate to review when it is clearer to a family what the disabled individual will need as an adult and what needs lay beyond what their state’s Medicaid services, Social Security payments and Medicare will provide. It’s better to assess these factors closer to a parent’s typical retirement age.
Furthermore, families risk spending close to the death value for their permanent life insurance when they purchase it too early. Savings is best done in a vehicle that can grow beyond the dollars contributed into the insurance policy, or to address other needs within their plan earlier in their lifetime. Remember, for most families we are trying to maximize the death benefit, not create savings in a cash value plan.
3. Following typical tax-minimization planning
Workers who have dependent disabled children of any age will benefit from tax planning. Because their Social Security earnings history directly impacts future benefits for their children, they should consider maximizing their Social Security earnings to maximize those benefits.
Adult children with disabilities are eligible for the disabled adult child (DAC) benefit off their parents’ work history when their parent files for a Social Security benefit. These benefits are highest when a parents’ work history is fully “paid up” with maximum earnings from 35 years of work. The lifetime benefit for an adult child is 50% of the parent’s full retirement age (FRA) benefit once the parent files and 75% after the parent dies. The benefit does not decrease or increase from early or late filing unless wages were earned beyond the FRA that impact the Social Security benefit calculation.
When parents are self-employed
Self-employed taxpayers are particularly at risk for underpaying themselves and putting less toward their own Social Security benefit. The increase in benefits may not personally matter to them, but it significantly impacts the financial flexibility of the disabled adult well beyond their parents’ lifetimes.
We encourage workers to earn Social Security benefits by realizing earned income in a few ways. This includes utilizing Roth savings when eligible and taking a higher payment from self-employment when applicable. Once an individual exceeds the Social Security wage base, advisors should discuss the typical tax deferral and tax protection strategies. You want people to pay taxes to get more benefits for their children.
Many families with special needs are regularly told by onlookers that they are doing things wrong, and they often personally fear this is true, too. It is in this context that we meet people who are hesitant to make a mistake, hesitant to trust advisors and reluctant to make a change in what they believe is the best thing to do. When they see financial advice online that’s standardized for typical families, they may fail to seek individualized support for their own family’s situation. I hope that more professionals will note how planning is different for these families and find ways to serve them better so they can let go of some of their fears.
Elizabeth (Liz) Wolleben Yoder is a CFP professional who specializes in planning for families with disabilities. Before becoming a financial advisor, she lived in a community as a caregiver to four adults with intellectual and developmental disabilities. Her time in that community led her to disability advocacy, which then led her into her career supporting families in their financial planning. Liz can be found on LinkedIn. Her practice home is Dependent Financial Planning.