By Marisa Rothstein, JD, CFP
As many as 40% of parents have adult children still living at home, according to a May 2022 Thrivent poll. While many grown kids choose to live at home, others have limitations that require continued parental support. Some physical or mental limitations may be medically diagnosed. Others may not have a diagnosis, but have limitations that s cause your child to depend more greatly on you for financial and emotional support. You may not even be able to put the exact limitation into words but, as a parent, just know they need a little more from you than other children. If you have an adult child at home, you know better than anyone the resources—emotional, financial, physical—it takes to support them.
While you invest so much energy in caring for your child every day, you should also prepare for the future; the reality is that you may not always be able to take care of them. Now is the time, when you still have the energy and capacity, to prepare for the contingency that your child may never thrive independently or, at least, may have periods in their life when they need additional support that you may be unable to provide.
Each family situation is unique. But here are some first steps to prepare your son or daughter for a future that may not always include you.
1. Apply for Government Benefits
You have supported your child into adulthood and perhaps feel you have the resources to continue that support. So why now seek government benefits on their behalf? First, if your child is eligible for these benefits, it could help you enjoy your own retirement by offloading some of the financial burdens of their maintenance. After all, you probably saved for your retirement and perhaps for your kids’ education, but you likely never planned for the high cost of maintaining another human being through adulthood. By tapping into government benefits, you may be able to regain a sense of your own financial security.
Second, navigating government benefits is a complex, time-consuming endeavor. With your direction and perseverance, you may be able to successfully steer the process and help establish your child’s eligibility. Before you pass away, they will already be set up with a financial safety net, and not have to explore this complicated system themselves.
2. Establish a Special Needs Trust
Even if your child does not currently receive government financial benefits, you should take precautions to protect those benefits if they do need and qualify for them. This includes Social Security Disability or Income as well as Medicaid, benefits they may not claim until long after you’re gone.
All of these benefits are means-tested—that is, they are limited to people below certain asset and income levels. Accordingly, if your child receives benefits and then has a windfall event—say, for instance, they receive an inheritance at your demise—the government will pause their benefits and require them to spend down the inheritance to $2,000 before resuming them. At that point, they will be left to rely only on the government benefits, as they may have depleted the resources you left them. Unfortunately, government benefits, although providing basic income and medical care, do not cover additional services or goods that could improve your child’s quality of life, such as education, travel, or cell phone service. Ideally, your child would be able to continue receiving government benefits while also maintaining their inheritance for these additional costs.
A Special Needs Trust could protect your child’s inheritance so it could be used to supplement—not replace—any government benefits they may one day receive. A Special Needs Trust can be testamentary, that is, established in your will and come into existence only at your death—or it can be living, meaning it is active now and you can begin funding and managing the trust during your life. Either way, the trust can preserve your child’s eligibility for Medicaid and Social Security because the trustee-- not your child-- would be the legal owner of the assets in the trust. Accordingly, those assets would not be included in their net worth or disqualify them from means-tested benefits. Instead, the trustee would manage the assets and release funds to pay for services and goods to benefit your child to supplement the government benefits—that is, to pay for things the government benefits do not.
A trust can also protect your adult dependent if they have a gambling, drug, or other addiction, which could be exacerbated by a sudden influx of cash if you leave assets to them outright. By leaving your inheritance to a trust, the trustee will be able to control distributions and what they are used for. A trust, whether it is used in tandem with government benefits or not, keeps assets out of the direct control of your child and protects the assets from misuse.
3. Update Beneficiary Designations
So, you have established a Special Needs Trust to receive your assets at your death and to protect your child’s potential government aid. But what about assets that pass outside of your will? This includes life insurance, annuities, and IRAs. Be sure to update your beneficiary designations on all of these vehicles to keep them consistent with your testamentary goals. That is, if you intend to pass assets to your adult child through the Special Needs Trust to protect their government benefits, make sure you name the trust as the beneficiary on your life insurance policy, not your child outright. Consult with a CPA before updating your IRA designations to minimize taxes on distributions.
4. Consider a Life Estate in your House
If your son or daughter is currently living with you, you might prefer they be able to stay in your house after you’re gone. But this may seem unfair to your other children, who would then not share in the value of the house at your demise. To enable one child to remain in the house, without seeming to favor that child, you can consider a life estate in the house for the child who currently lives there, with a residuary interest for the other surviving children. With a life estate, your child would have the right to remain in the house for the rest of their life. When they pass away or decide to move, the house becomes the property of the “residual” owners—perhaps your other children or family members. They can then decide whether to maintain the house or sell it and share the proceeds.
5. Assemble a Team
You may currently play quarterback for all of your adult child’s medical and other professional appointments. This can include scheduling doctors’ exams, claiming health insurance reimbursements, filing their tax returns, and monitoring government benefits. It is important to prepare for the day you are no longer able to juggle this by assembling a team of professionals who can support your child in your absence. This might include a CPA who can handle tax filing, an attorney who can help navigate government benefits and potentially serve as trustee of any trusts created for your child’s benefit, and a financial advisor who can manage trust assets. Ideally, you can vet these professionals and begin to establish relationships with them so they can learn about your concerns and goals for your child while you are still able to communicate with them. Create a list of these professionals, including their contact information and expertise, to leave with your will. If something happens to you, your family will know who to call and will already have vetted, familiar professionals to turn to for guidance.
You do a great deal to keep your adult child safe and healthy. But you may not always have the capacity to provide so much support. Take the time while you still have the energy to prepare your grown child for the future so their comfort and stability are ensured even after you are gone.
Disclaimer: This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal, or tax advisor for specific information pertaining to your situation.
About the author: Marisa Rothstein, JD, CFP®
Marisa Rothstein, JD, CFP®, launched Siena Private Wealth, a Member of Advisory Services Network, LLC to help clients achieve financial wellbeing through personalized financial planning and custom portfolio management. Marisa lives with her husband, daughter, and two furry friends in New York’s Hudson Valley.