While many parents are very responsible and do their best to
provide for their kids, many families also depend on government benefits which can
be very helpful to a family – even a family with adequate resources –
especially where there are other children, and when the parents have retirement
and college accounts to fund. Most of the time when a child with special needs
is in the family, parents (very responsibly) fund UTMA accounts for all of their
kids, including the child with special needs.
Many parents, however, actually end up doing their child a
disservice, because funds in the name of a child who is seeking
government benefits can prevent a child from qualifying for certain government aid.
Accounts in the name of the child (UTMA funds become the property of the child
when the child reaches the age of either 18 or 21 – depending on how the
account is set up) are considered to be owned by the child, even if the parent funded
the account (the funds are deemed to be gifts to the child). In some cases, when a child turns 18, (s)he
may be eligible for SSI (Social Security Income and other benefits such as
Medicare) as a result of a disability. However, for many programs he or she
will NOT be considered fully eligible until all of his or her other assets are
exhausted. If the potential recipient has funds in his or her name, the potential
recipient may have to “spend down” those funds before becoming eligible to
receive benefits.
Therefore, the parent is between a rock and a hard place. Do
the parents start saving now in the name of the child, or do the parents opt
NOT to put funds in the name of the special needs child? If the parent opts to
NOT put funds in the name of the child, they can put the funds in the name of a
third person with instructions to use that money for the benefit of the special
needs child, but many times the parents do not know someone who can be relied
on to care for the child if the parents are no longer able to.
Until very recently, the only safe way for families to plan
in advance to both (1) provide for their child, and (2) arrange the child’s
finances so that the child upon becoming an adult (age 18) will be eligible to
receive government benefits in addition to funds set aside by the parents, was
to set up a Special Needs Trust, also called a Supplemental Needs Trust (SNT). After the
SNT is created, the parents (or others) can add money to the SNT as gifts to
the child (up to the maximum amount per year that is exempt from gift tax). That
trust would also be in existence throughout the life of the child to accept any
death benefits payable to the child, should either of the parents or
grandparents pass away and leave funds to the special needs child.
If set up properly, the funds in the Parent SNT do NOT
disqualify the child for government benefits (because the trust, not the child,
“owns” the funds and the funds are distributed by a trustee strictly in
accordance with the terms of the trust). The main thrust of the SNT is that the
trustee (the parents or any successor) can only use the funds in the trust to
pay for any supplemental needs not covered by government benefits. Thus,
the child gets the benefit of government help AND other supplemental needs met
(such as recreation, education, etc.) from the funds set aside for the child’s
benefit. While a SNT trust is a good idea, it cannot be funded with funds that
are already considered to be owned by the child (UTMA account in existence), so
it is important for parents to set up an SNT as soon as they realize the need
for one.
Recently, Congress passed a law that will provide another alternative
to parents wishing to save for special needs children, or for persons with
disabilities to save for themselves. In
late 2014, the president signed the Achieving a Better Life Experience Act, or
ABLE Act. This new law, which is modeled after 529 college savings plans, will
allow people with disabilities (or others on their behalves) to open special
accounts where they can save up to $100,000 without risking eligibility for
Social Security and other government programs. While contributions to the accounts
are not tax deductible, interest earned on savings will be tax-free. Funds
accrued in the accounts can be used to pay for “qualified disability expenses” which
is any expense related to the designated beneficiary as a result of living a
life with disabilities and includes education, housing, transportation,
employment training and support, assistive technology, personal support
services, health care expenses, financial management and administrative
services education, health care, transportation, housing and other expenses. To
be eligible, a person has to have a “significant disability” with an age of
onset of disability before turning 26 years of age.
As of now, the total annual contributions to an ABLE account
by all participating individuals, including family and friends, is $14,000. There
are other limitations, including maximum amounts that can accrue in an ABLE
account and limitations on
the amount that is exempted from the resource limits for certain government
benefits. For example, the first $100,000 in ABLE accounts would be exempted
from the SSI $2,000 individual resource limit, but if the amount in an ABLE
account exceeds $100,000, the beneficiary would be suspended from eligibility
for SSI benefits and no longer receive that monthly income. However, the
beneficiary would continue to be eligible for Medicaid, but states would be
able to recoup some expenses through Medicaid upon the death of the
beneficiary.
The US Treasury Department, through regulations that are likely
in process of being written and that will hopefully be completed in 2015, will publish
more details explaining what a “significant” disability is and how to set up
and qualify for ABLE accounts. In addition, each state also put its own regulations
in place — much as they have done for 529 plans — so that financial
institutions can make the new accounts available.
While the addition of the ABLE account will provide more
choice and control for the family of a person with disability, the ABLE account
will not replace the SNT entirely. The cost of establishing an ABLE account
will be considerably less than a Special Needs Trust, because an ABLE account
will be able to be opened with a bank or financial advisor (a SNT can be costly
to set up, as it generally requires the services of a lawyer). Further, with an
ABLE account, account owners will have the ability to control their own funds (rather
than having the trustee of a SNT control the funds) and, if circumstances
change, the account owner will still have other options available to them. However, the ABLE account can only be opened
by someone with a “significant” disability (to be defined in regulations) and, because
of the likely monetary and qualification limitations that will be imposed on
ABLE accounts, a SNT may be more advantageous for some families. Determining
which option is the best for any family or person will depend upon individual
circumstances.
* “Special Needs” in this article refers to a condition or disability that will likely prevent a person from supporting himself or herself fully.
