Under the best circumstances, creating a financial plan involving a child with a disability or special needs can be challenging. When parents decide to divorce, it adds another dimension to the plan; however, with proper planning, the parents—along with trusted advisors—can create a plan that appropriately addresses the needs of the child now and in the future.
Ideally, the divorce will be collaborative with all parties working toward an agreement that is fair and addresses everyone’s concerns. Even in circumstances when the divorcing parents agree on items such as child support and custodial arrangements, care should be taken to document all of the issues. It is important to consult a team of experts that includes a special needs financial planner, both a special needs attorney and a domestic-relations attorney, as well as other experts who will be able to help plan for the future needs of the child or children.
There are several decisions that are typical in every divorce but need special attention when concerning a child who may not live independently in the future. We will discuss the watch-outs and areas that may require special consideration.
Custody and Living arrangements
Will the child live primarily with one parent, or will they live equally with both parents? Depending on the child’s circumstances, a typical custodial arrangement may not be suitable. Both parents will need to agree on a visitation schedule that causes the least disruption for the child. For instance, the child may not be able to spend every weekend with the non-custodial parent, either because of environmental reasons, therapy appointments, or simply because they are not able to leave the stability and routine of a primary residence. These factors need to be taken into consideration, and some creativity may be necessary prior to entering into a custody agreement. In fact if both parents can agree, some will decide that the parents switch residences to share time, leaving the child in the custodial home full-time.
Another factor for divorcing parents to consider is who will be the primary decision maker. Will all decisions be shared? Think about medical, educational, religious, and recreational decisions. Will both parents participate in the Individualized Education Plan (IEP) meetings or will one parent take the lead? Once an agreement has been reached, be sure to notify and provide copies to the child’s medical and therapy teams, their school, aids and caretakers to notify all teams of the changed family situation and outlining who will continue to make decisions on behalf of the child. Once the child becomes an adult, a decision around powers of attorney or guardianship will also need to be formalized and shared.
Government Benefits Eligibility
Due to the cost of care for a child with a disability or special needs, it is important to work with professionals who have a background in special needs financial planning, estate planning and divorce to consider all future expenses and properly fund future needs. Items to consider may include medical equipment, special diets, care expenses, medical insurance co-payments, etc. Government benefits may help offset these costs for those individuals who qualify.
In order for a child to be eligible for needs-based government benefits such as Medicaid, either now or in the future, they must stay below the asset and income threshold. This is especially important in the case of a divorce, when the child may receive child support payments. In order to protect the child’s eligibility for government benefits, a first party special needs trust (SNT) may need to be created for the benefit of the child. Once established, the trust can receive the child support payments. The trust enables assets to be set aside without disqualifying the child from receiving government benefits.
An ABLE account also may be a useful savings vehicle that can complement the financial plans for many families. ABLE accounts offer families the ability to contribute and save for any qualified expenses related to a person’s disability on a tax-advantaged basis. Balances in an ABLE account up to $100,000 do not affect a person’s ability to qualify for needs-based government benefits such as Supplemental Security Income (SSI).
Reaching the age of majority
Once a child reaches the age of majority (age 18 or 19, based on the state) he or she is considered a legal adult. If a child will not be able to make decisions on their own as an adult, guardianship or limited guardianship may be the answer. (This legal process should be started prior to the child’s reaching the age of majority.)
Another decision divorcing parents will face is determining which parent will be the primary guardian or whether they will share guardianship jointly. If guardianship is not required, a power of attorney might be necessary to help manage the individual’s affairs. The parent who does not have power of attorney or guardianship may face significant challenges when trying to get information from medical and service providers or making decisions regarding care. A potential alternative for some families could be joint or co-guardianship, if agreement can be reached.
Where possible, multigenerational successor trustees, agents or guardians should be named in order to help ensure the life care plan continues as envisioned after the death of the originally named parties. Naming successor trustees, agents or guardians might be just as important as naming the current decision makers.
Whether or not child support payments will continue after the child reaches the age of 18 should be decided in advance of divorce proceedings, to avoid being addressed in a court setting. Also take into account that future government benefits may be impacted by child support.
A milestone that occurs when the child reaches the age of majority is the ability to apply for government benefits. If child support payments have been structured to be paid to a SNT, and the child’s assets are below the threshold, the child may qualify for SSI and Medicaid benefits, even if they didn’t qualify prior to the age of majority when eligibility is based on the parents’ resources
If the child is covered under one of the parent’s medical insurance, it is important to have an agreement to continue coverage. A dependent with a disability is typically eligible for the parent’s employer-sponsored medical insurance plan, as long as the parent is employed, but if the parent who carries this coverage retires or leaves employment, an agreement should be in place regarding who will pay the premiums for replacement medical insurance coverage. If medical coverage is obtained through a state health insurance program, these reimbursements may have an impact on premiums paid. Maintenance of this coverage should be written into the divorce and custodial agreements.
Another transition milestone is when the child finishes school. Will the child need caregiving or will they work? Will the work be part-time or full-time? Will the child want to live on their own in a group or residential setting? Do both parents agree on these milestones?
Financial planning can be one of the most challenging aspects of divorce, and with the added responsibility of a child with a disability, it may seem overwhelming. It is important for all parties to remember that the goal of the plan is to achieve the best outcome for the child with a disability or special needs, as well as for other children and family members.
In addition to divorce and custodial agreements, other legal documents should be addressed. An SNT for the benefit of the child, as well as guardianship of the child are mentioned earlier, and separate individuals can be named to fulfill the responsibilities of these agreements.
Trustees of a trust make decisions regarding investments and use of the funds, ensuring compliance with laws, tax codes, and the trust document itself. Guardians make decisions regarding the care of the individual with a disability or special needs, and financial decisions on anything not covered by a trust. Successor trustees and guardians are designated to take over these responsibilities should one die, become incapacitated or can no longer serve in the role.
If a special needs trust or ABLE account is established, parents should notify anyone who may be considering a gift or bequest to the individual with a disability or special needs. These transfers can be sent directly to the individual’s trust or ABLE account to avoid potential disruption in needs-based government benefits.
When life changes, plans need to be updated. If there is an existing estate plan for a family, there is a good chance that it needs to be significantly revised in the event of a divorce.
Anytime there’s a person with a disability or special needs included, titling and beneficiary designations are even more important because of the potential impact inheritance can have on government benefits eligibility.
Close attention needs to be paid to beneficiary designations, trusts, powers of attorney and wills to ensure that the most current wishes of each family member are captured in their estate documents.
Designations can be made irrevocable in many cases, which can give peace of mind that ex-spouses won’t undo careful planning decisions.
Many divorced parents get remarried at some point, often creating additional complexities for dependents with disabilities and special needs. Routines and family dynamics can change anytime step parents and siblings are introduced into a family. Special care and extra communication can help ease the stress, but there are some legal and government benefits considerations that will need to be addressed as well.
Prenuptial agreements are recommended for any new marriages to spell out obligations for care of a child with special needs in case of future divorce. This includes stipulating how resources are to be used and what should happen if one of the spouses were to pass away.
When a deceased parent was receiving Social Security benefits, there are typically benefits available for ex-spouses, minor children, and dependents with disabilities. The prenuptial agreement should dictate which income benefits are to be used for the care of the child, and which are for the benefit of the ex-spouse. Overall, parents of children with disabilities and special needs should talk to an attorney about the rights that spouses have to inheritances in community property states and consider putting a property status agreement into place to ensure their child’s inheritance stays intact.
If a special needs trust hasn’t already been established, many attorneys will recommend that one is established prior to a new marriage. The trust can be a valuable tool to hold assets and income for a child with special needs and keep them separate from marital assets. The trust can have very specific instructions to ensure that needs and wishes are met, even when additional parties are involved in the family.
Finally, many stepparents choose to legally adopt children from their spouse’s previous marriage. In special needs situations, this decision may carry additional ramifications related to benefits eligibility and legal guardianship, so it’s important to work with a well-qualified attorney and explore all of the pros and cons.
Planning for a lifetime of care
A life care plan and letter of intent are important complements to a good financial and legal planning structure. Documenting all of the needs and wishes of the individual and caretakers for future caretakers and decision makers is critical to ensure continuity of care and vision for the future.
Communication is key
Ultimately, making sure that decisions are made with and communicated to all interested family members and professionals is paramount to avoiding disruption, confusion and disputes in the future. Once a plan is in place, save it somewhere safe and make sure to communicate where it is and how it can be accessed to ensure that the needs of children with disabilities and special needs will be well cared for in the future, no matter what.
This information is provided by Voya Cares for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision.