The financial costs of caring for a loved one with special needs can be staggering.
While the exact costs vary upon the type of condition and level of care, a condition such as autism can require lifetime support costing upwards of $2.3 million,
While clients can be motivated to plan for disabled relatives, many times they are hesitant to lose access to savings out of fear that they may need the money themselves. What’s more, a caretaker must weigh the individual’s needs against the family’s other financial goals and obligations.
In the past, planning for people with special needs often involved irrevocable trust strategies. While trusts can benefit the person with special needs, other family members had limited access to the investments. With the lifetime estate tax exemption doubled under the tax overhaul — it became $11.18 million in 2018 — most Americans do not face a federal estate tax.
A change in the tax law, and higher exemptions, have made it possible for clients to plan for the loved one’s care while ensuring protection for the family.
Determining the Need
The first step is to estimate the cost of caring for a relation with special needs. Costs can extend into adulthood and may increase over time. While an effective plan should preserve eligibility for government benefits such as Medicaid and SSI, keep in mind that many expenses are not covered. Certain medications and treatments, home modifications, therapy, education and vocational costs are often paid out-of-pocket. The plan must also establish who will care for the disabled person if the primary caregiver dies or is incapacitated.
The next step is to determine how to fund the plan. Families can help meet care costs by leveraging the plan with a permanent life insurance policy, helping to cover any gaps left by limited government aid. The death benefit, which is generally income tax-free, provides money to:
- help replace the services of a caregiver,
- enhance or supplement the benefits provided under government programs (e.g., for housing and other needs),
- provide a liquidity source to help equalize the inheritance for all heirs.
One Policy, Many Purposes
When the federal estate tax exemption was lower, it was common for a parent or caregiver to create an irrevocable third-party special needs trust during life. Assets would be used to purchase a life insurance policy with the trust made owner and beneficiary.
At the insured’s death, the death benefit received by the trust would be excluded from the grantor’s estate for estate tax purposes and distributions would provide ongoing care for the relative while allowing for access to government benefits.
Today, higher exemptions have made it possible for clients to plan for a loved one with special needs while protection the entire family. These dual goals can be accomplished by a caretaker personally owning a life insurance policy on his/her life that names a special needs trust as the beneficiary.
Although clients should work with their advisors to determine the appropriate ownership structure based on their personal circumstances, personal ownership by the caregiver can offer ultimate protection for the entire family. (Note, it is critical that the person with special needs never be the owner or beneficiary to avoid jeopardizing eligibility for government benefits.)
When ownership is structured this way, a trifecta of living benefits is available for the caregiver and insured:
- Access to potential policy cash to supplement income or to pay for unexpected expenses. However, loans and withdrawals may have tax consequences and will reduce the death benefit, cash surrender value, and may cause the policy to lapse.
- Money for long-term care expenses if the policy has a rider added.
- Money for serious illnesses, made available through a rider, can help if the caregiver suffers cancer or a stroke.
When the caregiver dies, the death benefit received by the trust can provide a liquidity source to help ensure the individual receives ongoing financial support while protecting government benefits.
At a time when clients are less concerned with estate taxes, but access and flexibility are more important than ever, a life insurance policy naming a special needs trust as beneficiary may offer a holistic solution: protection for your client today while ensuring a loved one’s care tomorrow.
