As medical advancements increase life expectancy, advisors
need to understand some special planning implications
by Donna M. Scalaro and Matthew Fitch
Ms. Scalaro and Mr. Fitch serve as Directors in Prudential’s Advanced Markets Department. Donna can be reached at donna.scalaro@prudential.com. and Matt can be reached at matthew.fitch@prudential.com.Life expectancy in America has risen steadily for the past hundred years. Professionals who plan for special needs individuals should pay close attention to this trend. The benefits and challenges of longevity will affect the special needs community along with everyone else.
The most recent Statistical Abstract of the United States (2012), a publication of the Department of Commerce, shows that in 1910 average life expectancy at birth among the general population was just over 50 years. But according to the Social Security Administration, for a child born in 2013, the average life expectancy is 82.8 years for males and 86.7 years for females. While longevity has increased at a steady rate since 1910, a few key advances in medicine may well cause life expectancies to spike upward, even lengthening life beyond what current statistics suggest for many people living today.
Among the developmentally disabled population, life expectancies historically lagged the population at large, but have experienced something of a late surge. Before the 1960s and 1970s, disabled individuals were often institutionalized. Since then, an emphasis on at-home family care and a degree of social independence has improved life expectancy of much of this population.
Special needs clients are those in society with one or more intellectual and developmental disabilities. Such disabilities are a group of severe chronic conditions that are due to mental and/or physical impairments. Special needs clients experience problems with major life activities such as language, mobility, learning, self-help, and independent living.
According to a 2010 study by Tamar Heller at the University of Illinois, the mean age at death for special needs clients can range from the late 50s (for those with more severe disabilities or Down syndrome) to the early 70s for adults with mild/moderate disability. The same study showed that, with projected longevity, the number of adults in the U.S. with disabilities age 60 years and older may nearly double, to 1.2 million by 2030. Effective planning will involve setting aside resources to sustain an individual into old age, as well as expanded outreach by care-giving professionals to help the growing number of individuals and families.
For example, Down syndrome is a genetic disorder caused by the presence of all or part of an extra copy of a specific chromosome. One of every 691 babies born in the United States each year is a Down baby, according to a 2010 study in the scientific journal Clinical and Molecular Teratology. The syndrome causes growth delays, a set of physical characteristics and a degree of intellectual disability.
Life expectancy for people with DS has increased in recent decades – from 25 in 1983 to 60 today, according to the National Down Syndrome Society. A 1991 study in the American Journal of Mental Retardation confirmed that medical problems were not a consistent predictor of mortality, which had been a common belief. Instead, self-help skills were the best predictor of life expectancy. Another factor is the prevalence of congenital heart defects in DS newborns. According to the Centers for Disease Control and Prevention, 50% of Down babies are born with a heart defect. Average life expectancy at birth for all DS babies is skewed by this phenomenon, and a DS individual with no heart problem may thrive well beyond the statistical age for the group.
Recently it has been reported that as DS individuals live longer lives, they may run the risk of developing many conditions associated with aging, including a high risk of early-onset Alzheimer’s. Research is limited, but some studies have said that 60 to 75 percent of DS people over age 60 will have Alzheimer’s, as reported in a 2008 New York Times article. This compares with the roughly one in three individuals in the greater population who die with some form of dementia, according to a 2013 study published on alz.org, the website of the Alzheimer’s Association.
The question of how to manage care and maintain quality of life over many years looms large for special needs clients and their families. Though public benefits are of enormous help, obtaining them can be complicated, and rules vary by state. Some of the better known and most-used public programs include:
Supplemental Social Security Income (SSI)
SSI provides an income benefit to children and adults who are disabled. For SSI disability purposes, at age 18 a disabled child must then re-qualify as a disabled adult, under different criteria. Eligibility at such time only takes into account personal resources and income, not parents’.
Social Security Disability Insurance (SSDI)
Under this program, recipients qualify for benefits by having contributed to Social Security through employment. “Disabled” children, as defined by the Social Security Administration, may earn benefits by having a qualified parent who either:
- Reaches a certain age
- Is disabled
- Dies
Benefits under the program may continue when children reach adulthood as long as they meet the eligibility guidelines. A disabled person’s own earnings can also cause eligibility.
Medicaid – Medicaid is a health care program that provides medical benefits for individuals with low incomes and limited assets. In many states children who qualify for SSI also qualify for Medicaid. In some states, Medicaid coverage is automatic with SSI qualification, but other states require a separate application.
Private Resources
Among the disabled individual’s sources of support, private support – meaning the family – is the one constant. Public support is vital, but frequently the family wishes to provide more. A common challenge is helping the disabled individual find care and enjoying life to the fullest without sacrificing any public benefits. Adding to that, there is a risk that public benefits will not keep up with the financial challenges of long life. Now more than ever, a supplemental private plan can create peace of mind for the family. The following are two strategies that may be available.
Discretionary support trust
This trust is funded by the special needs individual’s family. It can help provide for the individual’s basic needs, over and above what public programs provide. The trustee’s power of absolute discretion is intended to abnegate any obligation to provide support or maintenance of the beneficiary, which could disqualify the beneficiary from public support. Consequently, the state may have no cause to deny benefits on grounds that the beneficiary has assets of his or her own. However, not all states agree with this reasoning, and very careful review of state law is necessary to properly structure the trust.
Discretionary non-support sprinkle or spray trust
This trust gives the trustee sole discretion to provide only for non-support items such as holiday and birthday parties, entertainment, and health aids not covered by public benefits. Some planners recommend using the discretionary support and non-support trusts together, with the support trust a last-resort backstop for public programs, and the non-support trust available for the little things that make a big difference in the special needs individual’s quality of life.
Without proper funding, a supplemental private plan will not serve its purpose. For a family of average means, funding at death is often the most realistic option. Assets owned by the parents at death are used to fund the individual’s future needs. But with longevity affecting all groups, the parents may need to spend assets for their own support, or even spend them down completely to qualify for Medicaid themselves.
Given this uncertainty, the use of a life insurance policy with a fixed death benefit may help create long-term stability in the plan. Certain guaranteed death benefit products can ensure a specific amount is payable no matter when the insured person dies, provided the required premiums are paid. This can bring peace of mind knowing that a specific funding level will be achieved for the special needs individual. In general, life insurance death benefits are received income tax-free.
Other Taxes
Other tax issues, such as the estate, gift, and generation-skipping tax consequences of making gifts to trust, are outside the scope of this article, but need to be considered carefully. A qualified attorney specializing in special needs planning and a qualified tax advisor should be consulted when implementing the plan.
Even for special needs clients and families that have a plan in place, the increased longevity of special needs people may now mean that more resources may be necessary. Without proper monitoring, even the best plans can fall short in ensuring the financial and emotional security and care of a loved one with special needs. Together with a team of legal and tax professionals, today’s financial advisor can help tailor a plan that is appropriate for each client’s individual circumstances.
Life insurance is issued by The Prudential Insurance Company of America and its affiliates, Newark, NJ. Each company is solely responsible for its own financial condition and contractual obligations. The availability of other products and services varies by carrier and state.
This material is designed to provide general information about the subject matter covered. It should be used with the understanding that Prudential is not rendering legal, accounting or tax advice. Such services should be provided by the client’s advisors.
