Many, if not most, people who are working (or have retired) have a retirement savings plan such as an IRA or 401(k). Parents of children with special needs need to be extremely careful when considering who to name as the beneficiary of such a plan.

Most retirement accounts allow the owner to choose a beneficiary to receive the funds in the account when the owner dies.  The account owner names a “primary” beneficiary who is first in line to receive the benefits, and may also name a “secondary” or “contingent” beneficiary(ies) who would get the funds if the primary beneficiary has died. Account owners can usually name multiple people as beneficiaries and can often name a class of people, such as “my surviving children” or “my nieces and nephews,” instead of designating people by name.

The ability to name a class of beneficiaries often leads to trouble when a member of the particular class has special needs. The retirement account grows over time, but the owner rarely, if ever, reviews the beneficiary designation. Many years later, when the account owner dies, the original beneficiary designation may be in effect which can create tremendous problems for the child with special needs, jeopardizing government benefits. For example, let’s say a person fills out the IRA beneficiary designation form naming “her children” as the beneficiaries. If one of these children (who may not have even been born when she filled out the form) has special needs and is receiving needs-based government benefits, like Supplemental Security Income or Medicaid, her receipt of her share of her mother’s IRA could make her ineligible for those benefits. This is not just a problem for large retirement accounts given the strict income and asset limits for many government programs. Even an inheritance of a few thousand dollars can lead to the loss of health insurance worth a great deal more.

There are several ways to deal with this issue.  The easiest way is to avoid class designations by specifically naming the beneficiaries of the retirement account and not including a relative with special needs as a beneficiary. The obvious drawback of this strategy, especially when the retirement account makes up the majority of a family’s net worth, is that the child with special needs loses his inheritance. A better option for those who want to leave a share of a retirement account to a person with special needs is to create a special needs trust and name it as a designated beneficiary. If properly drafted, the special needs trust can receive the retirement funds without negative income tax implications, and the funds will assist the person with special needs without compromising government benefits. 

The same can be said for life insurance policies, whether privately held or employer-sponsored. The same concerns regarding retirement account beneficiaries apply when naming beneficiaries of life insurance policies. However, life insurance may be a great option for funding a special needs trust, because it provides a relatively low-cost way to provide a much larger benefit to the person with special needs in a protective way. 

If you are just starting to save for retirement or if you have an old IRA that you haven’t paid much (if any) any attention to, you should consult with a qualified special needs planner to make sure that your retirement plan does not interfere with the benefits of your child with special needs.