Private retirement savings plans, like IRAs and 401(k)s, have become the main way for American families to save for retirement. But parents of children with special needs need to be vigilant when signing up for a retirement plan or company life insurance program.
Most retirement accounts allow the owner to choose a designated beneficiary to receive the funds in the account if the owner dies. This beneficiary designation is especially useful because it allows the funds in the retirement account to pass to the owner's heirs without the cost and hassle of probate. In general, an owner names a so-called "primary" beneficiary who is first in line to receive the benefits, as well as a "secondary" or "contingent" beneficiary who would get the funds if the primary beneficiary has died or refused to accept the account. Account owners can usually name multiple people as beneficiaries, and they can often name a class of people, like "my surviving children" or "my nieces and nephews," instead of designating people by name.
This ability to name a class of beneficiaries often leads to trouble when a member of the particular class has special needs. Problems also arise when parents name account beneficiaries when they first join a company, often before having a child with special needs. The retirement account grows over time, but the owner never revisits the beneficiary designation she created when she was just starting out. Many years later, when the account owner dies, the old beneficiary designation springs up and creates havoc for the child with special needs. For instance, if an employee fills out her IRA beneficiary designation form to give her $200,000 IRA to "her children" on her death, and she dies with four surviving children, each child will receive a $50,000 retirement account. If one of these children has special needs and is receiving needs-based government benefits, like Supplemental Security Income, Medicaid or Affordable Housing, her receipt of her share of her mother's IRA could compromise her access to benefits. This is not just a problem for large retirement accounts; given the strict income and asset limits for many government programs, even an inheritance of a few thousand dollars can lead to the loss of health insurance worth a great deal more.
There are several ways to deal with this problem. The easiest way is to avoid class designations by specifically naming the beneficiaries of the retirement account and not including a relative with special needs as a beneficiary. The obvious drawback of this strategy, especially when the retirement account makes up the majority of a family's net worth, is that the child with special needs loses his inheritance. A better option for families who want to leave a share of a retirement account to a person with special needs is to create a special needs trust and name it as a designated beneficiary. If properly drafted, the special needs trust can receive the retirement funds without negative income tax implications, and the funds will assist the person with special needs without compromising his benefits. If the family has other assets outside of the retirement plan, it may make sense to fund the special needs trust with those assets while leaving the retirement plan to other beneficiaries.
Employer-sponsored life insurance can be essential, especially for younger families. In many cases, companies will provide small policies that pay a death benefit equal to a year or two of salary. Employees usually have the option to purchase additional insurance, often at a discount, through their employer's benefit program. The same concerns regarding retirement account beneficiaries apply when naming beneficiaries of life insurance policies. However, life insurance may be a great option for funding a special needs trust, because it provides a relatively low-cost way to provide a much larger benefit to the person with special needs. In some cases, employees who have children with special needs may consider naming a special needs trust as the primary beneficiary of their company life insurance policy, and they will often purchase additional insurance to guarantee that funds will be available for their child with special needs if they were to pass away.
If you are just starting to save for retirement or if you have an old IRA that you never paid any attention to, a qualified special needs planner can make sure that your retirement plan does not interfere with the benefits of your child with special need.