Roughly one in four adult Americans has some significant disability.1 Chances are you know someone who’s taking care of a person with an underlying health condition or impairment. While each circumstance is unique, thinking of the financial planning process as three phases can help optimize available resources and ensure that an individual with a disability has vital support over their lifetime. First, prepare for the worst-case scenario. Second, enhance security. Third, create better-case scenarios.
Before we get further into the three phases, let’s consider some recent statistics that highlight why long-term financial planning for those with disabilities is such a critical topic today. Nearly 50 million people are taking care of a friend or family member.2 While some mental or physical impairments occur at birth, and some disabilities are the result of accident or injury, many face health problems when they grow older. Two in five people over the age of 65 have some sort of disability.3
Keep in mind that today’s statistics don’t capture the health effects of long COVID because its impact isn’t fully understood yet. The evidence so far suggests that 20 to 30 percent of people who get COVID-19 will experience significant cognitive, psychological, and physical impairments that limit work capacity.4 The bottom line is that disabilities are common, they often arise without notice, and they can have serious financial implications. That’s why proactive planning is essential.
Gaining and maintaining eligibility for key government programs can help build a financial foundation for those with health conditions or impairments. These programs are the four cornerstones of support that many people will need during their lifetime. Social Security Retirement Benefits (SSRB) and Medicare are available to older Americans who qualified by paying premiums (usually taxes withheld from paychecks) throughout their working years.
Social Security Disability Insurance (SSDI) is for people who suffer a disability before retirement age. Also, if an individual receives SSDI for two years, they automatically become eligible for Medicare coverage. For instance, if SSDI starts at age 35, Medicare eligibility is age 37. People with disabilities diagnosed before age 22 can be eligible for Social Security and Medicare benefits based on a parent’s work history, which can provide a bigger benefit because the parent has probably paid into those programs for many years.
Meanwhile, Supplemental Security Income (SSI) and Medicaid are means-tested programs for low-income individuals who have less than $2,000 in assets. For 2023, the maximum federal amount for SSI is $914 per individual and $1,371 for an eligible individual with an eligible spouse. Before age 18, parents’ assets and income are considered when determining eligibility for SSI and Medicaid, which disqualifies many children. Once the person reaches majority age, however, they can become eligible based on their own financial situation.
The four cornerstones, though valuable, are generally not enough. Supplementing these benefits without undermining or endangering eligibility for SSI and Medicaid is a challenge many people will likely face. For example, let’s say an adult with a disability receives SSI and Medicaid and, after a few years, a parent passes away, leaving them a $100,000 life insurance benefit. The inheritance not only disqualifies them from means-tested programs, but also can be confiscated by the state for repayment of benefits previously paid. That’s a worst-case scenario: The parents tried to support their child, who happens to be an adult with a disability, but their life insurance money never reached the intended beneficiary and actually resulted in a loss of government benefits too.
How can you ensure that a person with a health condition or impairment doesn’t lose benefits as the result of a life insurance payout or other asset transfer?
A discretionary trust (also called a supplemental needs trust or special needs trust (can sometimes) ensures a transfer of assets without endangering means-tested benefits. There are three variations:
Be sure to consult a legal or tax professional to determine whether a discretionary trust is right for your situation.
Cornerstone public programs are a financial foundation for people with special needs. Estate planning is the plumbing that can deliver cash flow for supplemental needs without undermining the foundation. And a comprehensive financial plan is a framework on the foundation, specifically designed to enable a good life. The next step is to wrap the framework with a layer of protection against other perils that can lead to financial ruin.
Enhancing security also means assessing insurance needs. Unpaid medical bills is one of the leading cause of bankruptcy, so health insurance often becomes the most critical need after a disability is diagnosed. Also, because a disability typically increases expenses and decreases an individual’s or family’s income, life insurance should be assessed as well.
A typical life cycle includes: a dependency phase when parents are relied on for support; an accumulation phase when savings are built; and a distribution phase when the workforce has been departed and accumulated assets are being relied on for income. Because a person with a disability typically has a shorter accumulation period (see figure below), their long-term retirement savings goals might need to be substantially different than those of a typical client. For example, a married couple that has a child with a disability might need to plan a retirement for three people instead of two.
What are some of the tools that can be used to help beef up finances and can provide a fuller life for someone with a disability?
Efficient savings can make a substantial difference over time. Qualified retirement plans such as an IRA or 401(k) provide important tax advantages for long-term investors. Health Savings Accounts are also tax-advantaged and can be used not only to pay periodic medical expenses, but also to save for the long term.
In addition, passage of the Achieving a Better Life Experience (ABLE) Act of 2014 created tax-advantaged savings accounts for individuals with disabilities diagnosed before age 26. The total contribution to an ABLE account in a single tax year is capped at $16,000, and the first $100,000 in an account is exempt from the SSI $2,000 individual resource limit.
All of this planning, insuring, saving, and investing is meant to enable people with disabilities to live secure and meaningful lives. That means shifting the focus from what’s important for them to what’s important to them—from their needs to their dreams. Their aspirations are not unlike those of their peers, thanks in part to the inclusion of children with disabilities in our public schools since the mid-1970s. Today the frontiers of inclusion are expanding rapidly in both post-secondary education and employment opportunities. There may be challenges in preventing hard-earned money from interfering with essential public benefits, but ultimately everyone can gain when all of us are allowed to make our unique contribution to the community that supports and values us.
The past few years have underscored the fact that disabilities can happen unexpectedly to anyone, thwarting even the most thorough financial plan. While government programs can offer cornerstones of support, they’re often not enough. Looking at a lifelong financial plan in terms of three phases—preparing for the worst-case scenario, enhancing security, and creating better-case scenarios—can help preserve essential benefits while providing sources of supplemental support for the long term.