Financial Planning for Families with Children with Special Needs
Posted on June 25, 2019 by All In
What are the key considerations in financial planning for families taking care of a child with special needs?
In this article, our guest blogger Eric Seah, Founder of Eric Seah & Associates will take you through the 5 main considerations in detail. In particular, he explains the five financial ratios of cash management, his recommendations for insurance, reasons why the costs of education is more expensive than people think, the two methods for retirement planning, and considerations for estate planning.
Contributed by Eric Seah Sheau Ming
The 5 Main Considerations
Financial planning for families taking care of a child with special needs does require more thought and planning.
There are the 5 main considerations:
- Cash Management
- Risk Management and Insurance Planning
- Education Planning
- Retirement Planning
- Estate Planning
I will go through each point in detail below.
A good personal cash management plan starts with the consideration of the worst case scenario.
In the event that you or your partner becomes unemployed, it is important to consider whether there is sufficient money for the following:
- housing mortgage (if any)
- sufficient CPF OA balance for the entire tenure of the housing loan (if any); and
- ongoing costs of your child’s special needs; such as education and therapy.
A good recommendation is to maintain 6–12 months of savings depending on your age and profession.
One way to assess the family’s financial health is to consider the five financial ratios:
Risk Management and Insurance Planning
You need to make provisions to take care of your children with special needs in the event of premature death or disability.
So, what asset should we be using to manage risks? We need to ask the following questions:
- Which asset is liquid at your death?
- Which asset is not subject to market conditions?
- Which asset gives you immediate value without requiring time to accumulate and pays out the most at the event of death?
Yes, it is insurance.
You can buy either term or whole life insurance.
My recommendation is to consider:
- a core insurance policy to take care of death, disability and critical illnesses; and
- a term policy with death and disability only, to cover the period when
- the family income is the highest,
- the dependants are either young or old, and
- liabilities are the highest.
It is also important to get a policy that provides good coverage for critical illnesses and hospitalisation bills. This is to avoid causing further burdens to the family.
People sometimes have the misconception that since there are heavy subsidies, education for children with special needs is affordable. However, this really depends on many factors, especially your household income. A typical household with both working parents might not qualify for many of the subsidies.
Currently, many parents enrol their children in the Early Intervention Programme for Infants and Children (EIPIC). Demand for the programme is high but industry players have said that it is not a substitute for preschool education.
EIPIC seeks to help children with special needs to maximise their developmental growth potential and “learn how to learn” and is for families to learn how to support them, but it is not a kindergarten or pre-school programme. Children attending EIPIC who are ready to do so should enrol in a mainstream preschool as well.
As a result, parents of children with special needs often trawl forums or rely on word-of-mouth to find a suitable kindergarten. Many of them end up turning to costly preschools or preschools far from their homes, or signing their children up for additional enrichment lessons. This may add to the costs.
After pre-school, if the children cannot be enrolled into a mainstream school, they will need more funds for their education as they have to be enrolled into a special need school.
Again, there is financial assistance for Singaporean student but the qualifying criteria is stringent:
- Gross Household Income (GHI) not exceeding $2,750 per month, or
- Per Capita Income (PCI) not exceeding $690 per month
With this in mind, it is possible to plan for your child’s education using a child education insurance or similar products.
For retirement planning, you can work out how much you need per month after retirement by using the adjusted expense method. This means adding up how much you spend per month now and adjust the amount with the appropriate inflation rate.
However, it is not sufficient to consider only consider the expenses as this will result in a higher chance of underestimating retirement requirements.
If you want to maintain your standard of living as much as possible, a more conservative method is to estimate the retirement expenses using the income replacement method. This means aiming for two-thirds to three-quarters of your current income to live comfortably.
Do take the expenses of supporting your child with special needs into consideration when you make your retirement plans.
“What is fair is not always equal, and what is equal is not always fair”
As difficult as it is to discuss, the reality is that we will not live forever. An achievable estate plan has two equally important components:
- Assets and Liabilities that you have
- Distribution tools to use
Assets and liabilities
- What assets or liabilities do you have prior to your death?
- Are the assets liquid?
- Are the values of the assets subject to market conditions?
- Do the assets need time to accumulate?
- What liabilities do you have that might wipe out your estate and leave nothing for your family?
Liquidity is an important consideration as it provides for your family’s immediate needs.
There are two ways you can finance your estate:
1. By using insurance
This is the easiest approach. You can finance the trust from the proceeds of existing whole life insurance or term insurance policies, together with a partial (or the entire) unutilised portion of your retirement fund.
2. By using property capital or income
This means that the trustee may have to try to sell the property at a profit or negotiate reasonable rental or even collect rental income to provide for your child with special needs and other beneficiaries.
If the wrong asset is used for the provision, the executor will be pressured to try to execute the will fast and the trustee will have the stress of managing the asset.
What distribution tool (a will or a trust) should you use to take care of your child with special needs?
For families with a child with special needs, a simple will may not work. You may need to include a testamentary trust (inside a will). A testamentary trust will allow you to draw up conditions for the distribution of your estate.
And before you decide whether a will is right tool, you may need to ask yourself if you have somebody you trust as an executor, trustee and guardian? Family members can be appointed as trustees over the fund so that your child with special needs can be properly looked after under professional care.
Is bypassing the probate process important for you? Is privacy a concern for you? Since you may have to provide more for your child with special needs, do you want other beneficiaries to know?
If all the answer to each question above is yes, then you may need a trust instead.
There are two options in Singapore, the SNTC Trust and the private trust.
The use of a private trust to look after a child with special needs, specifically a private “standby” trust structure, is a plausible solution. The standby trust provides flexibility and allows the parents to decide on the funds needed to be injected into the trust in order to provide for their child.
If budget is a concern, then SNTC Trust might be an option. The SNTC was set up in 2008 to enhance the financial security and well-being of people with special needs through the provision of trust services. Apart from the lower cost, SNTC also offers a care plan that private trusts may not.
Special Note: CPF Nomination
Do note that your CPF monies do not fall under your estate. Thus, you will need to make a CPF Nomination to specify how you want your CPF monies to be distributed after your passing.
The CPF Nomination covers your CPF savings in your Ordinary, Special, MediSave and Retirement Account. It also covers any unused CPF LIFE premiums which were used to pay for your CPF LIFE, as well as any discounted SingTel shares that you may have.
As stated on the CPF website, there are three options that you can choose for how your CPF nominees should receive your CPF funds. They are:
- Cash Nomination: This the default nomination type.
- Enhanced Nomination Scheme (ENS) Nomination: Your nominee(s) will receive the CPF savings due to them in their CPF accounts.
- Special Needs Savings Scheme (SNSS) Nomination: This scheme is applicable for parents with children with special needs.
The SNSS Nomination allows parents to nominate their children with special needs to receive their CPF savings on a monthly basis. If you are considering this option for your child with special needs, you can find out more from the Special Needs Trust Company Limited.
Making a CPF nomination is neither a requirement nor a necessity. This is because even if you do not make a CPF nomination, the entire savings in your CPF accounts will still be distributed by the Public Trustee to your family members according to the Intestate Succession Act or the Certificate of Inheritance (for Muslims).
In conclusion, if you have a child with special needs, your planning in these 5 areas needs to start immediately.
Do talk to a financial planner who is trained and experienced in this area, and who is able to set up a trust for you.
Eric Seah Sheau Ming:
- Finalist and Winner of Financial Planning Awards 2019 – Insurance Open Category
- Certified Financial Planner (CFP)
- Chartered Financial Consultant (Chfc)
- Associate Estate Planning Practitioner (AEPP)
- Certificate for Financial Services – Trusts and Estate Planning, Singapore
You may contact him at email@example.com