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A $250,000 Mistake

A $250,000 Mistake

Why would any investor seek to gain 7% on their portfolio only to have 25% of their investments go to waste? Similar scenarios play out in my office on a regular basis as I ask people about their beneficiary designations and their intentions to help family members with special needs.

A woman came in to my office and she was unhappy with the investment advice she was getting from her broker and wanted someone new to hire to help her with her portfolios. During our meeting, we discussed her goals, her family and her current needs. She had several children – one of whom is an adult with autism.

Her retirement account beneficiary designations name each of her children – even the child with autism. This child is already considered qualified disabled and his disability allows him to qualify for government benefits – like Medicaid and Supplemental Security Income (SSI). Her son will be have a chance to live independently and securely with these benefits. SSI will pay him $714 per month in Colorado and Medicaid provides access to health care and a number of supported living environments. SSI is worth $8,568 per year. Medicaid benefits could equal $50,000 easily.

Unfortunately, he does not qualify for benefits if he has more than $2,000 in countable resources. Retirement accounts, investment accounts and bank accounts are all countable resources.

If Mom were to pass away, this son with autism would have $250,000 in a countable resource as the beneficiary of her IRA. Her money will go directly to him. He will lose all of his government funded benefits as a result and have to spend the $250,000 before he can qualify again. He could be off benefits for 5 or 10 years as a result of this oversight.

There is a solution. In her case, a simple solution. Mom had an attorney who created a will with special-needs trust provisions. A simple change to her beneficiary designation allows the trust to keep the $250,000 (less taxes) in it to be used for his benefit and keep his SSI and Medicaid assistance in place. Her advisor never asked (apparently) about her family members and if any of them had special needs. All Mom had to do was designate the trust as one of the beneficiaries and the share for her son with autism would be protected.

The $250,000 that goes into the trust can be used to supplement the basic level of care provided by government benefits. Special-needs trusts pay for travel, subscriptions, movies, therapies, clothing and more. The trust can be used to pay for care not provided by Medicaid – which is mostly food, shelter and medical. The trust enriches life by giving people with special needs access to funds to supplement government benefits.

Too often, sellers of financial products do not understand the government benefits available to families like ours. They skip over issues created by required forms as they rush to open accounts or sell insurance products.

Coordinate your beneficiary elections with your estate plan. Most trust attorneys will give you the exact language to use when opening accounts that require a beneficiary form. This language will say something similar to, “The Special Needs Trust under my Will,” or “The Special Needs Trust to benefit …”

Take the time to review all of your current beneficiary designations. The first step is to list your accounts, life insurance, annuities and retirement plans on a piece of paper. Then, call the advisor, agent or company and confirm the current beneficiary of the account. You can change all of these – usually with one form.

Do not make a $250,000 mistake. Chances are your advisor is not familiar with the issues impacting families with a special-needs member. Ultimately, you are responsible for these decisions. Take a few minutes to fix any mistakes in your accounts today so that you can preserve a better quality of life for your family member with special needs.

Call me at (710) 632-0818 to schedule an appointment to review your current situation or to work with us on investing for the future and financial planning for families with a special-needs member.

Originally published in 2014.