Financial Planning for a Disabled Child, Part II

Have you planned ahead for the financial well-being of your disabled child? Make sure your loved one doesn’t have money worries after you’re gone. This is the second of two posts on how a family with a disabled child can plan ahead to provide financial security for their loved one. In the first post, I reviewed government programs that can provide vital health coverage and income to those with disabilities. Read that post here.

Financial Security for the Long Run

As a parent of a child with a disability, one overriding worry I can’t shake is the concern of every parent everywhere: what will happen when I’m no longer around? Family members and anyone else who cares about someone who’s disabled — be it a physical disability, an intellectual impairment or a mental illness — should be aware of financial arrangements that can smooth that person’s life now and help to ensure they don’t have money worries after you’re gone. In this post, I’ll go over several saving/financial planning vehicles that can be extremely valuable for those with disabilities – Achieving a Better Life Experience (ABLE) accounts and Third Party Special Needs Trusts. If this sounds like something you might need to know about, read on.

Achieving a Better Life Experience (ABLE) Accounts

ABLE accounts — A way for disabled people to save
*Pigs on Parade, Seattle, WA, 2007*

A 2014 Federal law has made it possible for disabled persons to establish ABLE accounts, special savings/investment accounts for people with disabilities. ABLE accounts are modeled on 529 College Savings accounts; they are operated by states, allow limited yearly contributions ($15,000 in 2020), and permit savings to grow tax-free. Importantly, assets up to $100,000 held in an ABLE account will not be considered countable assets for SSI purposes; this allows the disabled account owner to build up some savings without losing her SSI benefit.

Other benefits: the beneficiary (i.e., the disabled person) determines how money is spent; expenditures are tax-free and do not count as income for SSI purposes so long as they are used for a qualified disability expense (a broadly defined category); and ABLE funds can even be used to pay for living expenses (food and rent) without impacting SSI. Accounts are easy to set up (you do have to attest to a qualifying disability), and anyone can make a contribution.

What are the downsides? ABLE accounts are only available to those whose disability manifested itself prior to age 26. (The logic behind this limitation is not clear to me – perhaps it has to do with modeling the program on College Savings Plans?) Annual contributions are limited. And ABLE accounts have a Medicaid payback provision: money left in an ABLE account when a beneficiary dies can be reclaimed by the state to compensate for past Medicaid coverage.

Despite these caveats, an ABLE account can be a great boon, allowing a disabled person to qualify for valuable government benefits while still maintaining some financial independence.

Special Needs Trusts

Might make a good trustee?
*Pigs on Parade, Seattle WA, 2007*

Another way to provide for a disabled loved one’s future financial needs is to establish a trust. A Third-Party Special Needs Trust is a particularly useful form of trust for this purpose. As the name implies, such a trust is funded by a third party (such as a parent), and is often set up as a “testamentary trust,” i.e., it is contained in a person’s will and established after death. A Third-Party SNT must be managed by a trustee, who might be a relative or a professional (such as an attorney).

Because the trust is funded and controlled by third parties, it does not count as an asset for SSI purposes and does not endanger benefits. (It must be managed carefully, however, so that it maintains strict independence from the beneficiary. If the government determines that it is controlled by the disabled beneficiary, the income and/or assets will be counted as hers and the jig is up.) Unlike an ABLE account, a Third-Party SNT is not subject to Medicaid payback after the beneficiary’s death.

Third-Party SNTs do have some disadvantages. Trusts are legally complex, and you would be well advised to hire an attorney to draft the documents setting one up – which can run into thousands of dollars. Typically, SNTs are set up as a part of an estate plan; if you’re contemplating setting one up in your own will, make sure you go to an attorney who specializes in this area. Ongoing management of the trust — including all distributions — will require expense and/or time on the part of the trustee and any experts (such as accountants) she hires.

Another potential downside: it may be frustrating to the beneficiary to have no control over a trust established for his benefit (on the other hand, if there’s doubt that the beneficiary would do a good job managing a substantial sum of money, the funder might see this as an advantage). Also, the Trust is constrained in what expenses it can pay; if the Trust pays for living expenses (food and rent), SSI benefits will be reduced by up to 1/3.

ABLE Account, Special Needs Trust – Or Both?

ABLE accounts and Special Needs Trusts each have their advantages and disadvantages. The table below highlights some of the pros and cons of each (potential cons are italicized).

Financial Accounts for the Disabled — Comparison

Characteristic	ABLE Account	Third-Party Special Needs Trust	Most Other Accounts
Who controls	Beneficiary	Third party	Varies
Cost to set up/maintain	Minimal	Substantial	Varies
Setup complexity	Minimal	Attorney needed	Varies
Funding Source	Anyone	Third party	Anyone
Contribution Limit	$15,000/yr	No limit	No limit
Account Limit	$100,000*	No limit	No limit
Spending constraints	Can pay for most things**	Can’t pay for food, rent***	None
SSI/Medicaid impact:
Account balance	None*	None	Over $2,000 disqualfies for SSI
Contributions	None	None	Count as income for SSI
Expenditures	None	None***	May count as SSI income
Taxation of gains	Not taxed	Taxable unless distributed	Taxable
Medicaid payback	Yes****	No	No

* ABLE account balances above $100k countable for SSI
** Must be used for Qualified Disability Expenses – includes most things (including food and rent)
*** Payments for living expenses reduce SSI benefit by up to 1/3
**** Medicaid may seek “payback” for expenses after beneficiary’s death

Which one should you choose to create financial security for your disabled loved one? If the disability wasn’t present until age 26 or later, the ABLE account is out. On the other hand, trusts, because of their legal complexity and expense, probably don’t make sense unless you expect to leave significant assets (hundreds of thousands of dollars) at your passing.

If both options seem to be viable, consider establishing both. The two accounts can work well together: the ABLE account provides for some financial independence and allows payments for living expenses, while the Third Party Trust is more appropriate for larger bequests and preserves the assets for future heirs. A Trust can even make contributions to the beneficiary’s ABLE account.

Get Started

Providing for the financial security of a child or other loved one with a disability can be a daunting task. But you don’t have to do everything at once; take it a step at a time.

Step 1 – Medicaid: If you live in an expanded Medicaid state, start by applying for Medicaid (or insurance under the ACA, if her income is too high).

Step 2: SSI/SSDI: Does your child have a work record? Or did he become disabled prior to age 22? If the answer to either question is yes, he may qualify for SSDI. If no (or the work record is too brief), SSDI is not in the cards, and she’ll probably want to apply for SSI (with your help). If she has savings, you may want to help her set up an ABLE account before applying for SSI. To document that she’s qualified for an ABLE account, request a letter from her doctor clearly stating a diagnosis of her disabling condition. Once the ABLE account is in place, gather your notes and medical records and start the SSI application process. Keep on top of the follow-up steps.

Step 3: Special Needs Trust: Once you’ve recovered (!) from the SSI process, get some recommendations from people you trust and set up an appointment with an attorney specializing in estate planning for special needs families. This is a good opportunity to bring your estate planning up to snuff; most of us don’t have up-to-date wills, powers of attorney and advance health directives in place. Making estate planning arrangements for your loved one with a disability is a good motivator to do something you should probably do anyway.

Take your time, and keep at it. Once you start getting things in place, your momentum and confidence will build. And when you’ve successfully implemented some or all of these financial planning steps you will have the satisfaction of knowing that you’ve done what you can to provide for the future financial well-being of someone you love. You’ll sleep easier, too.