Financial planning for those with special needs

Q: Our adult daughter has Down’s Syndrome. We have been thinking of setting up a special needs trust to help provide for her care. Should we open an ABLE account, as well?

A: Financial planning for individuals with special needs poses unique challenges. The goal is to help an individual receive needed support from family and friends without losing government benefits. Special needs trusts and ABLE accounts can help you do this.

Special needs trusts are very flexible and come in three varieties: first-party, third-party, and pooled. Given your circumstances, I suspect you are probably considering a third-party trust.

A third-party special needs trust is usually set up by parents or friends of a person with special needs. It can hold almost any kind of asset, including financial assets and real estate. There is no limit to how large the trust can grow. Funds from the trust can be used to pay for the beneficiary’s needs beyond those covered by government benefits.

A key provision with third-party special needs trusts is that they have no Medicaid “payback” requirement if the beneficiary dies. In contrast, other types of special needs trusts and ABLE accounts are required to reimburse as much of the accumulated Medicaid benefit as they can upon the death of the beneficiary.

Unfortunately, administering a special needs trust is tricky. If the trustees distribute too much income to the beneficiary, the beneficiary can lose needed benefits. On the other hand, if the trustees retain too much income in the trust, the undistributed income will be subject to extremely high tax rates. An experienced professional trustee can help balance these competing concerns.

ABLE accounts are much simpler, but they also have limitations.

ABLE accounts are a product of the Achieving a Better Life Experience Act of 2014, better known at the ABLE Act. ABLE accounts are tax-advantaged savings accounts similar to the 529 plans used for college savings. Contributions are made with after-tax dollars and grow tax-deferred. If distributions are taken for qualified disability expenses, the distributions are tax-free.

To be eligible for an ABLE account, a beneficiary must have developed her disability before age 26. In addition, she must qualify for SSI or SSDI or have a physician certify that she has “marked and severe functional limitations.”

Contributions may be made by any person, including the beneficiary, family or friends, but total contributions are limited to $14,000 per year. Although ABLE accounts can hold as much as $300,000, SSI benefits will be suspended if the account value exceeds $100,000.

The tax deferral and simplicity of ABLE accounts are obviously very attractive. Unfortunately, the limitations on account size and annual contributions make them inadequate as a complete solution for disability planning. However, when combined with a special needs trust, ABLE accounts can help in some practical ways.

For example, in some circumstances, an ABLE account can give the beneficiary a greater sense of self-reliance. She can build savings and manage a portion of her finances herself. ABLE accounts can help trustees perform their function better by giving them a place to put distributed income that would otherwise disqualify them. In any case, the low cost and simplicity of ABLE accounts mean you can experiment with them to discover how they can best help your particular situation.

 

Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell,   2340 Garden Road Suite 202, Monterey, CA93940 or email them to steve@montereypw.com.