Special Needs Financial Planning

Financial Planning Challenge

Many families have members with special needs, and this means a need for special financial planning. 1 in 54 children are diagnosed with an autism spectrum disorder.[1] Beyond ASD, 1 in 5 U.S. households has a child with some form of special needs.[2] In navigating their unique world, families with special needs children may find financial planning one of the biggest challenges.

Why is This a Challenge?

While the average child in the United States can cost around $230,000 to raise a special needs child can cost twice that and more if supported beyond 18.[3] The government provides many services to individuals with disabilities in order to alleviate some of these costs. But with limitations on eligibility, many parents can often feel as if they must choose between their child receiving accessible care or their child possessing assets for needs beyond government benefits and programs.

The most commonly received government benefit for the special needs population is SSI. SSI is Supplementary Security Income, a federal income assistance program for people with qualifying disabilities. The federal program pays a standard $771 per month but this amount can vary depending on the individual’s situation.

If an individual has more than $2,000 in assets, their governmental benefits will be affected. It is crucial in your planning to ensure your child does not disqualify for SSI or other government services. Even with the best intentions, families often accidentally disqualify individuals by providing for them through the wrong channels. So, are there ways to provide your child with assets beyond $2,000 while preserving their benefits? Thankfully, options do exist!

Special Needs Trusts

Special Needs Trusts or SNTs allow money to be protected for the benefit of an individual with special needs without risk of disqualification from governmental programs. However, one must be very careful with how the trust is structured.

A properly structured SNT may allow the grantor to set aside assets for their child with specific instructions to a trustee for how to distribute these funds to the beneficiary. Since these assets are in the name of the trust rather than the child, an SNT can avoid SSI disqualification, protect assets from litigation/abuse, and reduce estate taxes, all while providing more financial resources for your child.

There are several types of SNTs (first-party vs third-party, pooled, testamentary, inter vivo, etc.) and these should be explored with a trusted professional. Grantors should carefully consider how distributions will be made to ensure their vision and values are reflected well and to ensure their child has access to the necessary amount of funds but not so much that they may be wasted or abused.

Finally, the selection of a Trustee is critical as this firm or person will ultimately be responsible for determining how funds are distributed. This is a tremendous responsibility and Grantors should carefully name Trustees who understand and reflect their values.

While the implementation of these trusts can be costly as there is a need for legal assistance, the lack of limit on amount of assets, the asset protection provided, and the estate tax efficiency often give comfort to parents and guardians.

529 ABLE Accounts

Another option is a 529 ABLE (Achieving a Better Life) account. Introduced in 2014, ABLE accounts allow individuals with disabilities to save and independently maintain funds to be used for qualified expenses. These are available to individuals of any age who developed a significant disability before the age of 26. ABLE accounts are similar to 529 college savings accounts (and in fact, 529 college savings accounts can be rolled over into 529 ABLE accounts) in tax-free growth and tax-free use of assets for qualified expenses.ABLE accounts are unique in that the beneficiary is also the legal owner of the funds and does not require a trustee to access those funds. $15,000 can be contributed by third parties (anyone other than the owner/beneficiary) per year. Funds in these accounts do not count against SSI eligibility when the value is less than or equal to $100,000. The beneficiary/owner can also contribute an additional $12,670[4] of their own income per year as well.

A Case Study

Max is 28, and while he lives with his parents and they provide for his basic living needs, he relies on the provision of SSI as well as other government services. Max’s parents want to ensure that he has the financial resources he needs should something happen to them.

They know that if they leave more than $2,000 to Max directly, he will lose his SSI benefits. Their financial advisor assists them in evaluating their options, including an ABLE account and an SNT.

There is a $15,000 contribution limit on the ABLE account, and Max’s parents want to leave him a much larger sum to ensure his ongoing quality of life after their passing. His parents also have concerns about him managing his own money, so they do not want to leave it directly to him. An SNT, on the other hand, could absorb the entirety of the assets while providing for a controlled method of distribution. Since the trust would not be in Max’s name, it would not affect his qualification for local and federal programs.

Given the large amount of the assets they wish to leave him, their advisor assists them in finding a qualified attorney - one well versed in special needs trusts - to implement the trust as part of their estate planning. Their advisor also helps the couple think about their long-term desires for their son, how the distributions might be structured, and the qualifications they should consider in selecting a trustee.

With the new attorney, his parents implement a testamentary SNT as part of their estate plan and select a trustee who they fully believe has Max’s best interests in mind. Max’s parents now have comfort knowing that Max will be provided for if something were to happen to them.

Conclusion

Both SNTs and ABLE accounts provide individuals with special needs and their families options for increased accumulation of assets, thereby giving them an increased independence, flexibility, and security. For parents seeking to financially provide for their child beyond their own lifetime, SNTs provide protection of an unlimited amount of assets from disqualification of services. For those looking for an increased financial independence, ABLE accounts can also serve as a limited vehicle for savings while maintaining government benefits.

We understand that this can be an emotional process with many difficult decisions. We encourage you to seek out a qualified financial advisor to give unbiased advice and resources as you pursue the options that exist. We at Kings Path would be happy to serve you as a trusted partner by helping you plan for your child’s future with your visions and values in mind.

[1] https://www.autismspeaks.org/autism-statistics

[2] https://mchb.hrsa.gov/chscn/pages/prevalence.html

[3]https://www.cesisolutions.org/2018/10/cost-of-raising-special-needs-child/

[4]$12,670 is the federal poverty level for 2020.