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…And More

James Lange, CPA, Attorney with Julieann Steinbacher, Esq., LLM

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 are:

  1. Optimal Roth IRA conversion planning 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 a large Roth IRA conversion and a series of backdoor Roth IRA conversions and Roth 401(k) contributions.
  1. We won our Social Security Disability Insurance (SSDI) appeal with the Social Security Administration formally establishing Erica’s status as disabled. Her Eligible Designated Beneficiary (EDB) status will allow her to stretch distributions from our inherited Roth IRA over her lifetime. (We secured Erica’s status through SSDI but this can also be achieved with a successful SSI application.)
  1. Finally, we drafted an optimized estate plan with appropriate wills, trusts, and IRA, 401(k), and Roth IRA beneficiary forms that will allow Erica to “stretch” most distributions from her inherited retirement accounts over her life. Please note that the trust that we drafted for her meets the four technical conditions to qualify as an EDB. In most trusts where the IRA or Roth IRA is the underlying asset funding the trust violates 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 the 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.

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

Plan now to protect your disabled child after your death. 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 without affecting eligibility for government benefits.
  • If your child inherits certain 401(k), 403(b), or other types 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 when 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.

Register to receive our detailed report and review assumptions for Figures 1 and 2 at https://DisabledChildPlanning.com.