Every parent faces a unique set of challenges when planning for their children’s future. But for those with a disabled or special needs child, the considerations become even more complex.
How can you save enough to cover the added expenses of coping with a disability—therapies, aides, equipment, extra technologies and services? How can you ensure that the savings is put to its intended use, especially when you are no longer around to manage the process?
Complicating matters further, many disabled and special needs children rely on government programs, like disability benefits from Supplemental Security Income (SSI) or medical benefits through Medicaid, that are means-tested. Any applicant with more than $2,000 in savings does not qualify for such programs, which naturally discourages disabled people and those who support them from accumulating savings. Fortunately, there are options that can address these particular challenges.
The Special Needs Trust
One option is to create a special needs trust (SNT). Like any trust structure, an SNT is a new legal entity that you create which “owns” assets for the benefit of a particular person or people, in this case the special needs or disabled person. A designated trustee is in charge of managing the assets, overseeing investments and withdrawals. In the case of an SNT, the trustee must be someone other than the beneficiary. Many families appoint a lawyer, a trust or bank officer, or a trustworthy family member.
One of the key advantages of an SNT is that the assets in the trust do not count towards the means test for government benefits. An SNT also offers the advantage of not having contribution or withdrawal limits. Any amount can be contributed to an SNT annually or in total, and there are no limits on how much money can be withdrawn to pay for qualifying expenses.
On the other hand, an SNT does not offer any tax benefits. As the assets in the SNT earn investment returns, dividends or interest income, those earnings are taxed annually, often at a higher rate than if they belonged to the beneficiary directly.
529A or ABLE Accounts
ABLE accounts are another, newer option available to families supporting a disabled or special needs child. The structure is like a 529 college savings plan—in fact, it’s characterized as a 529A. Legislation passed in December 2014, the Achieving a Better Life Experience (ABLE) Act, created the structure, which allows families to save and invest money for qualified disability expenses in the same tax-advantaged format they can use to save for college.
Like an SNT, one of the key benefits of an ABLE account is that it can protect the beneficiary’s eligibility for government benefits by not counting toward the $2,000 savings limit in the means test. However, this only applies to the first $100,000 in an ABLE account. ABLE accounts are offered by most states (and several states do not require in-state residency to open one). The accounts do have annual contribution limits ($18,000 for 2018), and may have a maximum dollar cap depending on each state. The options for investing the money will depend on each state’s program.
While ABLE accounts have more limits than SNTs in some regards, they do have the advantage of earning investment income and returns tax-free. ABLE accounts also tend to be less involved to set up than an SNT, since an SNT typically requires an estate lawyer or trust officer to create it.
Planning for You
Like all estate planning issues, the best solution really depends on your unique goals and circumstances. For many families, it makes sense to have both an SNT and an ABLE account. If you’re planning for how to save and provide for a disabled or special needs child in the future, start by considering these two structures, different in their advantages but both designed to help families in your situation.