The disability dilemma: How to use retirement tools for a special needs child

For the parents of a severely disabled child, one financial planning challenge looms over all others: making sure that child is provided for, long after the parents are no longer around to help. 

This is hard enough on its own, but added to it is another riddle: how to pass down enough savings without disqualifying the child from government benefits.

James Lange, an estate attorney and certified public accountant, knows the dilemma well. When his daughter, Erica, was 17, she was diagnosed with dysautonomia, a nervous system disorder that impairs her breathing, heartbeat and other crucial functions. 

"One day Erica was acing her SAT, and two days later she got so sick that she had to quit school," Lange said.

Despite her intelligence, Erica will never be able to hold down a job, her father said. This left him and his wife, Cindy, extremely fearful for their child's future — and they're far from alone. According to the U.S. 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 elder relatives trying to finance their futures — but they could use help from advisors.

"It's the most important thing that your client is thinking about," Lange said. "Don't talk about whether they should buy AT&T or IBM when that's not the issue for them. The issue for them is, 'What's going to happen to my kid after I die?'"

The Role of a Special Needs Trust

Tammy Wener, a CFP at RW Financial Planning in Lincolnshire, Illinois, has faced that question many times. Wener said that just in the past year, she's worked with about 10 families that have children or other relatives with special needs — and that number has been increasing. 

Of course, such clients typically want to bequeath as much money to their descendant as possible, but leaving too much could make the person ineligible for Social Security Income (SSI) and other public benefits, which can be crucial resources.

"It is so important for families to understand how to structure savings in a way that will not preclude the individual with special needs from accessing government programs," Wener said. "I have seen many situations where the individual with special needs lost important government benefits due to an inadvertently poorly planned inheritance."

To thread this needle, Wener recommends something called a special needs trust — also known as a supplemental needs trust. Since the inheritance is technically being left to the trust — not the person — the same asset limits do not apply.

"For government benefit purposes, if the trust is properly drafted and administered, then it is considered an exempt asset," Wener said.

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Use Retirement Savings

Lange did this for his daughter — with a twist. Most of the underlying assets of the trust are retirement plans. He and his wife have put decades of savings into several converted Roth individual retirement accounts and a Roth 401(k), all of which will be within Erica's trust, providing her with regular disbursements long into the future.

The Langes also took other steps. Most importantly, they won a "grueling legal marathon" to have Erica considered disabled by the Social Security Administration. This made sure she's eligible for both Social Security Disability Insurance and Medicare. It also had another benefit: Under the SECURE Act of 2019, a non-spouse beneficiary normally has to withdraw all the funds from an inherited IRA within 10 years. But since Erica qualified as an "eligible designated beneficiary" due to her disability, she can stretch those withdrawals over the course of her lifetime. 

All of these efforts, Lange said, added $1.9 million to Erica's projected income.

"She will not have to worry about money, and now neither Cindy nor I worry about her financial security after we're gone," he said.

Get Specialized Help

As Wener pointed out, these methods only work if the trust is drafted and administered correctly, which is extremely difficult to pull off. To do this, she urges advisors to talk to an expert before diving into the subject with a client.

"It can be a tricky area with many parts that have to work together," Wener said. "So I would recommend reaching out to someone in the financial planning community who is well-versed in this topic."

There are online resources as well. Wener recommends a website called Special Needs Answers, where attorneys 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 who wish to build up savings for a disabled relative.

And to top it all off, Lange himself has co-authored a report, available online, that explains what he and his wife did to secure Erica's future. The document offers detailed tips to other special needs families, who Lange is confident 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.

Wener also offers another bit of counsel to advisors: When providing for a disabled child, don't forget to take care of the parents as well.

"It's always a balance of making sure that the parents are also putting themselves in a good financial position," Wener said. "Really, it's planning for retirement for three people instead of two."

This kind 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 — though it took years of struggle — was a "huge relief."

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