Nuts & bolts of securing the financial future of a child with special needs

The financial planning here is markedly different from the kind done for a normal child; make sure you have enough tucked away -- and safely -- for your little one when you're no longer around

Rahil and Dishari’s only child, Yatharth, suffers from a rare malformation in the brain that has impaired his motor skills, speech, and skeletal and muscular systems. And although the child is a happy-go-lucky kid, his condition nevertheless requires constant medical attention.

But Dilshari, 30, an investment banker and Rahil, 32, an IT professional, have much more to worry about than just his health. How do they secure Yatharth's future and ensure he is financially stable as an adult?

Financial planner Pankaj Maalde says, “In such cases, financial planning is quite different from the kind done for a normal child. It is essential to ensure the child receives the best care even when the parents aren't around.”

A multi-pronged approach

Uttam Kumar Sen, founder, Step Ahead Investment Advisors, says it's a good idea to start saving early, say a decade or two in advance so that the couple has a sizeable overall corpus in hand.

Knowing how much you will exactly need to secure your child's future is a herculean task. But you can make an approximation of the medical and other expenses and factor in the inflation. Make sure your investments project enough surplus to take care of both, the child's normal and extra-normal needs.

“Ideally, the overall corpus should be 5-10 times the couple's combined annual income. They must also fix a time frame considering their life expectancy along with Yatharth’s,” says Vipin Bhutani, financial planner and founder of WealthMaker. The horizon can be as short as 5-10 years and stretch to 20-30 years.

Corpus for normal expenses: To build this stack, the parents can invest in a wide array of options, including but not limited to, equities, SIP (systematic investment plans), long-term equity mutual funds, balanced funds, PPF and post-office savings schemes.  

Once they've set a time horizon, the couple could look for asset allocation with at least 70-80 per cent in equity. That, of course, depends on their risk appetite. Nevertheless, they can afford to be a bit adventurous here, as they are young, and the planning is being done for the family as a unit, and not for Yatharth alone.

A balanced fund is a good option if they are first-time investors as they can always rejig the portfolio periodically, says Maalde. “Once they sort the investment route, they can decide upon payment module -- monthly, half-yearly or an annual. But when it comes to payback, they should opt for monthly returns, not a lump sum,” he adds.

This will ensure the returns are regulated and won't be squandered away. Insuring the parents: Each parent should also ideally take a term life insurance plan with a sum assured at least 10-15 times the monthly income, which in their case works out to an overall cover Rs 19 lakh at the lower end of the band. Each should also be sufficiently covered for unforeseen medical expenses and could take a joint health policy of up to Rs 20 lakh sum assured. Neither has a health cover currently.

Creating an emergency fund: This is necessary for meeting unforseen and immediate medical contingencies. Maalde says the savings here should be parked strictly in liquid funds and fixed deposits that can be converted to cash at short notice. The couple's combined monthly expenses, investments and EMIs are Rs 90,000. So they should aim at building a contingency fund no less than Rs 5.4 lakh to cover six month's expenses and investments.

Meeting extra-normal needs: The investments in this zone will cater specifically to Yatharth's medical and other needs, especially after his parents are no more. Currently, Rs 9,000 a month is being spent on his treatment, and Rs 3 lakh will be needed three years down the line for surgery. Maalde says the systematic withdrawal plan of a conservative mutual fund would work well, as it would deliver monthly payouts to meet Yatharth's regular treatment. For the surgery three years on, The couple could invest in liquid and ultra short-term funds for higher returns, instead of keeping money idle in savings accounts that give them a paltry 3.5 per cent.

For long-term medical and other expenses, especially those occurring after Rahil and Dishari are no more, the couple might consider working on a plan that fetches them Rs one crore in about 20 years. The couple's combined monthly income is Rs 1.9 lakh. After all expenses, they have a surplus of Rs one lakh. Sen says they can reach the Rs one crore milestone by spreading this surplus across various investment classes. He says debt mutual funds are the best way forward to build it slowly or over a period of time.

He also advises that they should invest in equity funds via systematic transfer plans spread over 12 months and invest a lump sum in hybrid and debt funds.

Succession planning

Rahil and Dishari need to figure out who will care for their child and how once they are no more. “In the absence of family and friends to rely on, one can opt for setting up a trust that can take over the financials and day-to-day responsibility of the child. Parents must appoint at least two trustees -- one, a family or friend, the other a corporate trustee,” says Arijit Ghosh-Dastidar, managing director of Dasgupta and Chatterjee LLC, a Kolkata-based estate planning firm.

Corporate trustees are firms that arrange various services required by the trust. They can put a system in place to pay for the child’s bills and disburse payments through such a channel. Identifying suitable trustees is important, to ensure the trust is used solely for the child's benefit.

A letter of intent should be drawn up, which will act as a guiding resource for the trust. This will pass on vital information about the child to the guardian or trustees. It should be written down in as much detailed as possible. A letter of intent is not legal paperwork, but one copy each should be given to the trustee and the guardian.

“A tracking mechanism must be worked out to check the trust’s performance, and all the assets should be ideally held under its name,” says Ghosh-Dastidar. Rahil and Dishari should ideally invest more in financial assets than physical ones as they are easier to maintain by the trustees. Physical assets should be limited to one property as managing multiple properties can be challenging.

Steps to form a trust: An efficient mode of estate planning is to set up a private family trust, through which one can plan the protection and smooth succession of assets.

• Under Indian Trusts Act 1882, the person (parent/guardian) forming the trust must list down its objectives and intentions.

• The settlor (person forming the trust) then decides on its structure - revocable or irrevocable.

• The settlor/s must also identify persons to be associated with the trust. Settlor, trustees, beneficiaries are important components of a trust.

• The family's intentions are then translated into a charter (trust deed), which should be reviewed carefully to ensure all objectives are included

• Setting the intrustment of the trust: The provisions depend upon intentions of the settlor and the nature of the trust. It may include provisions like the power of investments, distribution, general powers of trustee and power of adding or excluding beneficiaries

• Finally, the assets to be settled into the trust must be identified, their inventory made and their ownership transferred to the trust

Fending off the sharks

What happens when the trustee dies, and greedy relatives come to stake a claim on the assets left behind in the trust? Two or more trustees should be appointed so that if one dies, the other/s can continue protecting the child’s future. It’s also important to separate the two roles -- that of guardian (under whose care the child has been placed) and trustee so that if the guardian dies, the trust can still function and meet the child's needs. It is also advisable not to make a challenged child dependent on the goodwill of one's normal offspring, or jointly name them in property.

Setting up a Will

“In Rahil's and Dishari’s case, drawing up a Will is necessary to ensure the assets they leave for Yatharth are bequeathed to the trust. It is also important to appoint someone as a guardian and name him in the Will,” says Supratim Roy, a Calcutta High Court advocate. Guardian and trustee can be the same person though their roles are different. Some financial advisors, however, recommend that they should never be the same person. By separating these roles, you can ensure a “checks and balance” system to protect your child.

When it comes to Yatharth, the Will should not be a DIY endeavour. His parents should hire a lawyer, and once the Will is drafted, one copy should remain with the lawyer, one sent to the trustee and a third sent to the guardian. It is important to include “pour-over language” in the will and the special needs trust. “Such language indicates that any property that the child inherits will directly go the trust,” explains Ashik Hussain, a Calcutta High Court advocate.