Estate planning is always important to the people involved, but it goes to a whole other level when it involves the future care of a child with special needs.
It’s an issue that generally doesn’t receive much attention in the media, although it got a boost this past week from Carolyn T. Geer’s “Investing Basics” column in the Aug. 3 edition of The Wall Street Journal Sunday (“Estate plans needing more than a will”). In it, Geer says there is a growing sense of urgency amongst baby boomers to get their estate plans in order, and it’s especially true for boomers who have children with disabilities. The column goes on to mention the importance of not only a will, but a Special Needs Trust (SNT) for those who have a child with a disability.
The SNT is often critical in these situations, because if assets were passed directly to the child with special needs, it would jeopardize the child’s eligibility to receive government benefits.
If difficulty in choosing a guardian is the reason many parents procrastinate in creating a will, the thought of planning for a high level of ongoing care for a child with special needs is especially daunting for parents, and even for many insurance agents and financial advisors who have little experience in this area.
This is troublesome, because there are a lot of families out there who need help in dealing with these eventualities, and they often don’t know where to start.
Insurance Forums recently interviewed a pair of experts from Ohio National to discuss the unique challenges – and how to overcome them – that agents and advisors face when working with families who have children with special needs.
Jessica Walker, JD, LL.M., Senior Advanced Sales Consultant at Ohio National, says the special needs client is typically in a delicate state, particularly if they are still coming to grips with the fact that their child isn’t going to have the normal life that they had always expected.
“They do need some extra love. They’re overwhelmed,” Walker says. “They have a very personal issue and they don’t want to be taken advantage of.”
David Szeremet, JD, CLU, ChFC, Second Vice President, Advanced Sales at Ohio National, says many of the agents he works with are reluctant to enter the special needs planning market, despite there being a huge need for agents who can help these families.
“They think, ‘I don’t have a child with Down syndrome so I don’t know how to speak to them.’ They’re afraid. It’s the same as the agents I work with who say, ‘Oh, I’m afraid to approach business owners.’ Well, you’ve got to jump in with both feet,” Szeremet says. “A lot of these folks who are in these situations, they talk to each other. They visit the same physicians, they go to the same websites, they’re in the same support groups, perhaps. It’s an unbelievable opportunity for referrals.”
Szeremet adds, “lots of these families need help and I think if you look at just about any study out there, they’re not being approached. So I think there’s an incredible opportunity.”
Indeed, there are probably more families who have children with special needs than you might think. According to the most recent survey from the U.S. Department of Health and Human Services, 14% of children in the U.S. have special health care needs, ranging from chronic developmental, behavioral, physical or emotional challenges.
The Individuals with Disabilities Education Act (IDEA), amended by Congress is 2004, defines a “child with a disability” as any child who has:
“mental retardation, hearing impairments (including deafness), speech or language impairments, visual impairments (including blindness), serious emotional disturbance […], orthopedic impairments, autism, traumatic brain injury, other health impairments, or specific learning disabilities.”
Consider these facts from Autism Speaks and the National Down Syndrome Society:
- Autism now affects 1 in 68 children, and 1 in 42 boys. It is the fastest-growing serious developmental disability in the U.S.
- There are more than 400,000 people living with Down syndrome in the U.S. Life expectancy for people with Down syndrome has increased from just 25 in 1983 to 60 years today.
Continued advances in medical care are creating a greater need for advance planning for parents of children with special needs. Children born today with Down syndrome, for example, are statistically expected to outlive their parents. While children with autism have a mortality risk nearly twice that of the general population due to risk of accidents such as drowning, the condition itself does not affect life expectancy. This makes the need for planning essential, and means that families of children with special needs typically have lifetime insurance needs now as opposed to what might have been temporary needs years ago.
- Do you work with families that have children with special needs? Please share your thoughts and advice about the unique challenges of this market on this thread in the forum.
Start with a Letter of Intent
Szeremet and Walker both agree that helping clients draft a Letter of Intent is a good way to begin the process, because it shows the client family that you are truly interested in helping them and is a good building block for starting a long-term relationship.
“Many insurance advisors and planners forget about the idea of a letter of intent and how important that can be,” Szeremet says.
A letter of intent is not part of a SNT. Szeremet says it is really more akin to a love letter from the parents (or current caregiver) to the next caregiver. “A letter of intent really can go hand-in-hand with a special needs trust. The letter of intent is there really to give all the instructions,” Szeremet says. “Imagine if you became a trustee of a special needs trust for a sibling or a family member but you just didn’t know everything about that individual. You didn’t know their medical condition or what sorts of medication they are on; you just didn’t know a lot of their history. What does that individual like to do? What makes them comfortable? Have they ever been in a group setting before? How do they act around animals? What sorts of food do they like? All these sorts of things that really are about having a good quality of life. Do they travel? Do they go to the YMCA to swim?”
- Check out Ohio National’s Letter of Intent Workbook
Walker says this is all part of a slower approach, and that typically the agents that do well in special needs planning have a passion for it and are able to relate.
“Your empathy and your listening skills are going to be really important,” Walker says. “A letter of intent is a nice way for them to see that you’re focusing on the person right now. We’re not talking about anything else; we’re not talking about the trust necessarily or the funding, but we’ve got this person we’re concerned about and we love and we want to take care of. Here’s this great document that we can put all these great thoughts into, and I think it shows that level of empathy and caring.”
Types of special needs trusts
A Special Needs Trust, as defined by Investopedia, is a legal arrangement and fiduciary relationship that allows a physically or mentally disabled or chronically ill person to receive income without reducing their eligibility for the public assistance disability benefits provided by Social Security, Supplemental Security Income, Medicare or Medicaid.
The ability of a SNT to provide lifelong support for a child with special needs while protecting the child’s eligibility for government assistance makes it perhaps the most powerful tool a family can employ.
“One of the bigger reasons to have the special needs trust is to not jeopardize those government benefits. Even if you never plan to use them, you should really have all of your possibilities covered, and these provisions allow for that,” Walker says. “Trusts give you that control to dictate exactly how you want the money spent, and certainly in this case how you want the child taken care of.”
There are different types of SNTs, including first-party, pooled and third-party, categorized by whose assets are funding them. By far the most common type in special needs situations, Szeremet says, is a third-party special needs trust. Generally, this is where the parents, or sometimes grandparents, siblings, or aunts and uncles are funding it (often through life insurance) for the benefit of the loved one with special needs.
While a first-party SNT allows a family member or legal guardian of a person with special needs to transfer personally owned assets on a tax-free basis to the trust without disqualifying the person for SSI or Medicaid eligibility, first-party SNTs are required to reimburse the state’s Medicaid agency for the trust balance upon the beneficiary’s death for payments it made on behalf of the beneficiary.
With a third-party SNT, there is no Medicaid payback requirement at death, and it can be used as an estate planning tool. At death, a residual beneficiary of the third-party SNT can be designated to receive the balance of the trust assets.
Pooled SNTs are a reasonable alternative to doing a first- or third-party SNT if the family can’t come up with a logical choice for a trustee or don’t have enough money to justify creating an individual trust. They are managed by state governments or nonprofit organizations, set up to expertly run a master special needs trust on behalf of individual beneficiaries with special needs. Assets are combined and invested together, with funds spent in proportion to their share of the total amount.
- Do you work with families that have children with special needs? Please share your thoughts and advice about the unique challenges of this market on this thread in the forum.
Life insurance and SNT funding
Tax efficiency and the ability to provide a large death benefit make life insurance an effective liquidity tool to fund a special needs trust. The policy is purchased on the caregiver’s life (or if a second-to-die policy is used, on both parents’ lives), and the death benefit pays to replace the loss of services and support for the child with special needs.
While second-to-die or survivorship life has often been used for SNTs, Szeremet says he’s seen a move away from that strategy of late. The challenge is that say, for example, the dad is the breadwinner while the mom is the caregiver. If the breadwinner passes away, there’s a need for liquidity right then to replace the income. If the caregiver passes away first, who’s going to replace those services?
“In many cases I see a need for coverage on both lives – the caregiver and the breadwinner, so I’ve seen a great deal of interest in individual life insurance,” Szeremet says. “And on top of that I’ve seen an increase in interest in cash value life insurance because many cases involving individuals with special needs, they have living needs as well. It’s not just about the death benefit; it’s about living benefits such as medicine that is not entirely covered by Medicaid or therapy that might be deemed to be experimental that aren’t covered.”
Walker says another option to consider is a term life policy on the breadwinner and whole life on the caregiver, which allows for some premium affordability for the parents of a child with special needs while still having both lives covered.
“That way you’ve got the death benefit protection and you have the flexibility of the cash value. So sometimes combining and mixing and matching the policies can be a really nice way to help save clients some dollars,” Szeremet adds.
With third-party trusts, Walker says, generally the trustees are the parents who set it up, so they’ve got access to that cash value very easily.
Szeremet says second-to-die still has a place, especially where you have maximum affordability. “They can afford a permanent policy, but they really need to stretch those premium dollars as far as they can and you’ve got two parents there, it might be a way to go,” Szeremet says. But he quickly adds, “I’ve just seen my share of cases where there’s a liquidity need at both deaths.”
Help with underwriting
Knowing how to strategically approach the underwriting process can make a big difference in the type, amount and cost of the insurance coverage in a special needs planning situation.
The best way to help your client is by gathering a lot of information – and the right information the underwriter needs to help you negotiate the most competitive offer. The more information you can provide to the underwriter, the more likely you are to build a story that will help that underwriter feel comfortable assessing the particular risk.
Szeremet emphasizes that in the special needs market, there is inherently a huge emphasis on data gathering. “In this market really more than any, the agent has to be an excellent listener, and they have to ask the right questions,” Szeremet says.
Details include thing like what sorts of medications the child needs, what the medication costs, what sorts of therapy is needed, what equipment do they require, how long the equipment lasts before needing to be replaced, whether the living quarters need to be altered for safety or mobility, and plenty more.
“For the agent, they really do have to slow down with the client,” Szeremet says. “They have to be prepared to gather a lot of data, but if they can gather that data, it really helps the underwriter see the picture. The agents that do a good job on it are just really good listeners and good note-takers.”
Some carriers, including Ohio National, offer a special needs planning calculator tool to calculate funding needs that can also be helpful for underwriters. “That really demonstrates the need to underwriting,” Walker says. “They can see that this was really thought out.” If a carrier’s own calculator tool is figuring out the funding need, that is going to really help the client to secure an appropriate level of coverage.
Ask all your clients about it
Beyond working with families you know have children with special needs, it’s important for agents and advisors to remember to ask all their clients about this topic. You might well uncover a need you didn’t know about, or prevent the client from inadvertently risking government benefits.
“If you’re doing a true, all-the-way-through plan, you can’t miss the point to ask them if they have someone in their life with special needs,” Walker says. “Again, it’s about preserving government benefits and not jeopardizing that person’s future, so truly I think as a full, all-encompassing practitioner, it’s really a question you should always be asking.”
- Do you work with families that have children with special needs? Please share your thoughts and advice about the unique challenges of this market on this thread in the forum.
