Special Advisory Report For Parents Of A Disabled Child

Three Critical Steps to Protect Your Child’s Financial Security After You Are Gone.

The following text is the Highlights version of what we believe is the best resource we know for how a parent with a child with a disability can provide for their child.

 

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Important Update

Deborah L. McFadden, former United States Commissioner for Developmental Disabilities, is in the process of expanding the section of the Special Advisory Report that covers the application and qualification process for SSI and SSDI. Sign up today to receive the full current Special Advisory Report and you will automatically receive the expanded Edition when it is available.

Special Advisory Report For Parents Of A Child With A Disability

Highlights Edition

The single page Highlights Edition below provides an overview of the key strategies featured in the full (30+page) Special Advisory Report.

By James Lange, CPA Attorney With
Julieanne E. Steinbacher, Esq, CELA/LLM

Special Advisory Report For Parents Of A Child With A Disability​
Jim, Cindy & Erica Lange

Our Story

My daughter Erica has a disability that will prevent her from providing for herself. My wife and I worried endlessly, as do most parents of a child with a disability, about ensuring her safety and prosperity after we are gone. Using just three strategies, we took care of that worry. Consequently, Erica will have close to an additional $1.9 million dollars measured in today’s dollars to support her over her lifetime. Using the same strategies, someone with a $500,000 IRA can provide their child with an additional $239,000.

The Three Strategies

Learn what you need to know to make the best decisions for your loved one. If you have a child with a disability, there is likely no better use of your time than to read this report and implement at least some of the recommendations.

01

We formally established Erica’s status as disabled. This can be achieved after a successful processing of a Social Security Insurance (SSI) or Social Security Disability Insurance (SSDI) application. This critical step is what qualifies her as an Eligible Designated Beneficiary (EDB) thus enabling her to stretch distributions from the inherited Roth IRA and IRAs over her lifetime.  

02

We optimized our Roth IRA planning. Roth IRA conversions can make the biggest difference for many families with a disabled child. $1,297,500 of the $1,890,544 savings for Erica came from us doing one large Roth IRA conversion and a series of backdoor Roth IRA conversions and from making Roth 401(k) contributions.

03

We drafted an optimized estate plan with appropriate wills, trusts, and IRA, 401(k), and Roth IRA beneficiary designation forms. After we successfully established Erica’s status as disabled and she qualified as an EDB who can “stretch” distributions from her inherited retirement accounts over her lifetime, we drafted a trust for her benefit. The trust must also qualify as an EDB. To do that, the trust must be drafted to meet four specific technical conditions. The four conditions apply to all trusts when the underlying asset is an IRA, Roth IRA, or most retirement plans. If even one of the conditions is not met, the trust could lose its EDB status. Unfortunately, this type of drafting oversight is more common than not. If the trust loses its EDB status, it will trigger a massive tax acceleration for the beneficiary. An error of this type will jeopardize all your efforts to protect your beneficiary. For grandparents of a special needs child, one of our favorite estate plans is to combine our classic Lange’s Cascading Beneficiary Plan and a Special Needs Trust (we ensure that the trust meets the four conditions) for a grandchild with a disability. 

Please note that the trust that we drafted for her meets the four technical conditions to qualify as an EDB. Most trusts where the IRA or Roth IRA is the underlying asset funding the trust violate at least one of the four conditions to qualify as an EDB.

The potential penalty for that type of drafting error could be the loss of EDB status and result in massive tax acceleration. This mistake is quite common in other types of (non-special needs) trusts. The four conditions apply to all trusts when the underlying asset is an IRA or Roth IRA and must be met to achieve a favorable payout (10-year rule for designated beneficiary or life expectancy stretch for EBD vs. massive income tax acceleration). For grandparents, we love to combine our classic Lange’s Cascading Beneficiary Plan and a Special Needs Trust that meets the four conditions for the grandchild.

Report Co-Author Deborah McFadden and family with daughter, Tatyana McFadden, 20 time Paralympic medalist, at the finish line celebrating her first place finish in the Boston Marathon.

Report Co-Author Deborah McFadden and family with daughter, Tatyana McFadden, 20 time Paralympic medalist, at the finish line celebrating her first place finish in the Boston Marathon.

To download the full (30+page) Special Advisory Report, click the button below. 

Plan Now To Protect Your Disabled Child After Your Death

We are also setting in place measures to ensure that when we die, our estate is administered appropriately which will maximize Erica’s inheritance.

Some Additional Strategies To Consider:

  • Sometimes, the best solution is to have a Special Needs Trust that allows your child to receive benefits from your inheritance without jeopardizing his/her eligibility for government aid.
  • Use an ABLE account to save and invest money for your disabled child in a tax-advantaged way and without affecting eligibility for government benefits.
  • If your child inherits certain 401(k), 403(b), or other type of non-IRA retirement plans, consider planning for your child to convert the balance or a portion of the inherited retirement plan to an inherited Roth retirement plan after you pass. This little-known strategy is particularly profitable if you are in a high income-tax bracket and your disabled child will be in a low tax bracket.

Assumptions For Figure 1

• Starting balances: $65,000 after-tax investments; $250,000 traditional IRA in 1998.
• 28% income tax rate on distributions for parent; 15% for disabled child.
• 28% Roth conversion tax rate (1998) – $249,000 Roth conversion (1998).
• 15% tax on growth of after-tax investments.
• Distributions are not spent by parent.
• 6.5% rate of return (3.5% inflation).
• Parent converts traditional to Roth in 1998 – $249,000 (parent age 41; child age 2).
• Parent dies at 85 in year 2041 when disabled child is age 46.
• Figure shows child stretches retirement plan for 40 years when child is age 86.

Figure 1

Assumptions For Figure 2

• 6.5% rate of return.
• Traditional IRA assets = $500,000 + $152,000 after-tax dollars at death.
• Roth IRA assets = $557,000 + $0 in after-tax dollars at death.
• Owner dies age 85.
• Child inherits at age 54.
• In “inflation-adjusted” dollars.
• Tax rates = per AGI.
• Child Social Security = $25,000 (plus 3 percent inflation).
• Expenses = $103,000 [18 years from now (plus 3.5% inflation) which is less than $4,650/month in today’s dollars].
• Child with traditional IRA runs out of money when he is age 88.
• Child with Roth IRA has money through age 100.

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Special Advisory Report For Parents Of A Child With A Disability

Three Critical Steps To Protect Your Child's Financial Security After You Are Gone

By James Lange, CPA Attorney With Julieanne E. Steinbacher, Esq, CELA/LLM

Combining warmth and compassion with functional hard-headed advice, Jim Lange has provided families of children with disabilities with the guidance they need to achieve financial security.

Burton G. Malkiel

( Professor of Economics, Princeton University and Author, A Random Walk Down Wall Street, 12th ed. 2019 )

James Lange

CPA/Attorney/Registered Investment Advisor

Jim’s tax and estate planning strategies have been endorsed by The Wall Street Journal (36 times). He is the author of 8 best-selling books. Some of his books have been endorsed by Charles Schwab, Larry King, Jane Bryant Quinn, Roger Ibbotson, Ed Slott Bob Keebler Larry Kotlikoff, Jonathan Clements, Paul Merriman and Burton Malkiel.

James Lange

James Lange
Julieanne E. Steinbacher

Julieanne E. Steinbacher

Esq., CELA/LLM in Estate and Elder Law

Julieanne is the founding shareholder of Steinbacher, Goodall & Yurchak, an elder care and special needs planning law firm, with offices in Williamsport, State College, Wyalusing and Wysox, PA. As a former social worker, she has a unique perspective on children with a disability. Each of her law offices has social workers on staff to help families coordinate care and benefits.

Julieanne E. Steinbacher

To download the full (30+page) Special Advisory Report, click the button below.