ABLE or SNT? How Can I Save for My Child with Special Needs?

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.

Do I need to create a Special Needs Trust for my child with a disability?

What is a Special Needs Trust?

A Special Needs Trust (also called a Supplemental Needs Trust) for a disabled child is a trust formed by the parent and funded with assets that normally would placed into a regular account for the child, and which "shields" those assets from being considered assets of the child for governmental benefit purposes.

Many times, parents (very responsibly) fund UTMA (Uniform Transfer to Minors Act) or other accounts for their kids. Those funds are considered to be owned by the kids as a result of gifts from the parents to the kids. When the kids are minors, they cannot take legal ownership of the funds – that only happens when they reach the age of majority (either 18 or 21, depending on the actual account set up). Once a child reaches that age, he or she can legally do anything they want with the money. (Yes, sometimes, children don’t really know that the accounts can be accessed by them, and they allow their parents to direct as to how the funds should be spent - such as when the child is in college, and the child “pays” college tuition or other expenses with the funds.)

In some cases, when a child turns 18, (s)he may be eligible for SSI (Social Security Income) and other benefits such as Medicare/Medicaid 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. (The government does not pay social security income or Medicare/Medicaid if a recipient has other available funds, and requires the potential recipient to “spend down” those funds before becoming eligible to receive benefits.)

While many parents are very responsible and do their best to provide for their kids, government benefits can be very helpful to a family – even a family with adequate resources – especially where there are other children, retirement and college accounts to fund, etc. So, many families plan in advance to both (1) provide for their child, and (2) arrange the child’s finances so that the then-adult child (age 18) will be eligible to receive government benefits in addition to funds set aside by the parents (or others) as gifts to the child during the child’s younger years.

What a parent may want to do now is set up a Special Needs Trust (also called a Supplemental Needs Trust) (Parent SNT) that will be funded with future gifts from the parents and others (up to the maximum amount per year that is exempt from gift tax – now $13,000 per person per recipient - $26,000 per year from both parents and $13,000 per year from any other person). That trust would also be in existence throughout the life of the child to accept any death benefits payable should either parent or even a grandparent pass away. 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 in accordance with the terms of the trust). The trustee (you or any successor) can use the funds in the trust to pay for any supplemental needs not covered by government benefits -- the funds cannot be used to pay for ordinary daily needs that would be covered by governmental 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.

What if We Already Have UTMA Accounts in the Child's Name?

Here is the kicker. A parent cannot fund a Parent SNT with funds that are already considered to be the child’s (UTMA account in existence), and thereby convert those funds that are already in the name of the child to funds that are not considered the child’s for government benefit purposes. So, even if you set up a Parent SNT now, at age 21 when the UTMA funds legally vest in the child’s name, the UTMA funds may have to be used to  pay back government benefits (s)he had been receiving from the age of 18 and/or the existence of the UTMA accounts will disqualify her for benefits (even if (s)he was previously qualified) if the account still has a balance . So, while a child may have become eligible for and been receiving benefits from the age of 18, once the UTMA funds vest (s)he will become ineligible until those funds are spent to payback benefits already received. After the spend down, (s)he will then be eligible again for government benefits.

Again, when the child turns 18 years old, (s)he may become eligible for certain government benefits, and the UTMA funds vest in him/her when (s)he turns 21.  What some people do is use the UTMA funds already set aside for the benefit of the child with the intent that by the time (s)he turns 21 (s)he has no assets that (s)he owns and legally controls. During the period before the child turns 21, the funds in a UTMA account can be used to pay for supplemental expenses for the child –pay for school, pay for an apartment, pay for camp or a car, etc. If those funds are exhausted before (s)he turns 21, then she will not lose her benefits eligibility as a result of having available funds in her name when (s)he turns 21.

In the meantime, you can set up a Parent/Third Party SNT and fund that with future gifts to the child. That trust would be mentioned in the parents' wills as the trust that would receive any testamentary bequests from either or both parents, and would maintain eligibility for government benefits for a child who may be eligible.

For more information, consult: www.specialneedsalliance.org;

http://www.socialsecurity.gov/ssi/spotlights/spot-trusts.htm; and a lawyer experienced in handling special needs trusts in your State.