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Financial Planning for Your Disabled Child

Thinking about saving for your child’s future can feel overwhelming for many reasons. However, it is crucial to know how to save and invest without consequences—as well as to consider how your child will be cared for financially in the event of your death.

As a parent of a child with complex needs, you are likely accustomed to thinking differently about almost everything. Planning for retirement, death, and for your child’s financial future is no exception. In the U.S., most parents consider savings vehicles such as bank savings accounts and 529 college savings plans. But, for parents of kids with special needs, there are other factors to consider.

For example, the U.S. government considers the size of your child’s accounts when offering federal or state benefits. Setting aside money is therefore complicated by potential negative effects on your child’s government benefits. Fortunately, there are specific trusts and savings accounts designed to avoid these challenges.

We spoke with two financial professionals with experience in special needs planning to help guide decisions in these situations—Michael Briese, managing director and private client advisor at J.P. Morgan Wealth Management, and Mary Anne Ehlert, a financial planner and founder of Protected Tomorrows.

The three main options to consider are ABLE Accounts, Special Needs Trusts, and Custodial Accounts. Each has its own advantages, as well as limitations, that you should know about before opening an account.

SAVINGS | ABLE Accounts

The ABLE (Achieving a Better Life Experience) Act allows you to create a tax-advantaged savings account for your child. This account is in your child’s name and allows you to save money up to a certain limit without losing their eligibility for federal benefits such as Medicaid or SSI (Social Security Income). Income earned is not taxed, however, interest rates are very low, as they are with most savings accounts.

Requirements vary between states, however, in most cases, money in ABLE accounts can be used for disability-related expenses, such as basic living expenses, housing, transportation, assistive technology, education, employment training and support, personal support services, health, prevention and wellness, financial management and administrative services, legal fees, and, if needed, funeral and burial expenses.

One of the primary advantages of savings accounts in the U.S. is that they are insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain limit. If a bank faces financial difficulties, for example, funds in your child’s savings account are protected. The principal amount you deposit in an ABLE account remains untouched and safe. Any interest earned is a bonus on top of your original sum. This means that the money you set aside for your child’s future remains safe and provides a foundation for long-term planning or emergencies.

With an ABLE account, you can access the funds quickly, easily, and without a penalty, at any time, as long as the funds are used for qualifying disability expenses. This is particularly helpful if your child has unexpected medical expenses. Also, anyone can contribute to your child’s ABLE account, such as grandparents, family, and friends, up to a certain limit. Contributions are not tax-deductible at the federal level, but some states may allow for income tax deductions or tax credits.

What to consider before opening an ABLE account

Many banks require a minimum initial deposit to open an account and/or may have fees attached to maintaining an account. ABLE accounts have yearly contribution limits, usually following annual gift tax limits, which differ between states; generally, the limit is $14,000-$17,000 a year. “An ABLE account is a great tool,” says Ehlert, “but know that you can’t get too much in it.”

Young boy putting his hand into a coin jar labeled "savings."
Credit: iStock | narith_2527

It’s important to keep an eye on these thresholds, so you don’t inadvertently disqualify your child from receiving government benefits. Also, if you are a coholder on the account, there could be tax consequences for you. To avoid penalties, and to relieve stress, you may want to consider turning to a financial advisor to manage these decisions. In some cases, fees for basic services are wrapped into interest gained on your accounts, so you will not have to directly pay an advisor for their services.

While savings accounts are a safe option, they traditionally offer low interest rates, compared to investment options, and therefore, the value of funds may diminish over time due to inflation. Also, by placing funds in a savings account, you exclude opportunities to invest in stocks, bonds, or other investment platforms that could yield higher returns over time.

There are some other factors to consider when creating an ABLE account for your child: Currently the law states that a child must have a disability diagnosed before the age of 26 to be eligible for an account. Also, when a child passes away, money that is left over in an ABLE account may go to the state to cover any Medicaid costs incurred from the time the account was opened. This is commonly known as the “Medicaid Payback” provision—the State could recoup Medicaid-related expenses, but only after you pay any outstanding qualified disability expenses, including funeral and burial expenses. After qualified expenses are paid, and Medicaid payments are paid, you (or whomever you name the Designated Survivor) receive the remaining assets.

TRUSTS | Special needs trust (SNT)

A special needs trust (SNT) is an account that contains assets such as money, real estate, mutual funds, and/or stocks to support your child. It is also sometimes called a supplemental needs trust. Because the assets belong to the trust, and not your child, they don’t affect your child’s eligibility for government benefits like Medicaid or Social Security Income (SSI).

Young girl excitedly smiling at the camera, holding a twenty dollar bill.
Credit: iStock | LUNAMARINA

Many parents are attracted to special needs trusts because they safeguard benefits while offering opportunities for investing. And, as with ABLE accounts, families can spend from the trust to support their child. “The use of the trust is for supplemental care over and beyond what the government pays for,” says Ehlert. This includes all sorts of options, from dental and new glasses, to covering expenses associated with vacation and dining out, she says.

“A trust is also a good option when parents are looking to leave assets to take care of their child’s needs, most often after the parent’s death,” says Briese.

“You can’t leave money to your child directly because they’re going to lose government benefits, but you can leave it to this trust,” says Ehlert. This is particularly important if you have your own will or trust.

Another benefit is that the legal requirements and rules associated with an SNT ensure that the assets are used as you intend, even after you pass away. This can help your family avoid financial consequences associated with direct inheritances.

Like most accounts, family and friends can make contributions to a trust account. However, there are tax consequences if the amount of the gift exceeds $13,000 for an individual or $26,000 for a married couple.

What to Consider Before Opening an SNT

Maintaining a special needs trust involves costs, including set-up and ongoing management fees. Some organizations may require a minimum amount in order to set up a special needs trust. “Special needs trusts are quite technical,” says Briese. “It’s a good idea to work with a legal professional who is very familiar with their operation and experienced in special needs planning.”

For example, the structure of an SNT is restrictive. All funds are owned by the trust, and you and your child can’t access the money directly. Instead, you need to ask the trustee (the individual person or bank who manages the money in the trust) for any money your child needs. When your child comes of legal age as an adult, depending on the circumstances, they could find this limits their independence.

In the event of your child’s death, SNTs may act similarly to ABLE accounts. Medicaid may also seek compensation with remaining funds, after any payments for qualifying disability expenses, including funeral and burial expenses.

There are three main types of Special Needs Trusts (SNTs):

Third-Party Trust: You or another family member can set up a Third-Party SNT for your child. A third-party trust cannot hold assets that once belonged to your child.

Non-Pooled (also known as a First-Party or Self-Settled) Trust: Your child (the beneficiary) can create their own non-pooled trust. The beneficiary’s original assets may be included in this trust.

Pooled Trust: Nonprofit organizations administer pooled trusts. Instead of a trust dedicated to your child alone, the trust pays out to multiple beneficiaries (perhaps multiple children).

INVESTMENTS | Custodial Account (UGMA/UTMA)

A custodial account is an account with financial assets, such as cash, stocks and property, that is managed by a trusted adult (the custodian), such as a parent or grandparent. Your child is the account owner, but the custodian makes the financial decisions, such as buying or selling stocks. Each state has its own guidelines regarding issues such as the custodian’s responsibilities and the age at which your child is considered an adult and can handle their own finances.

One of the perks of custodial accounts is the flexibility. Unlike 529 college savings plans, which can be used only for educational expenses, custodial accounts don’t strictly dictate how funds can be used. Instead, funds are used “for the benefit of the minor,” which is applied to your child’s situation. So, whether it’s to pay for housing, clothing, or extracurricular activities, they should be covered, as long as the expenses benefit your child. Also, since the IRS considers your child to be the account owner, earnings are taxed at your child’s income tax rate, and not yours, up to a certain threshold.

What to Consider Before Opening a Custodial Account

The main downside with custodial accounts is that they could interfere with your child’s government benefits. “Once a child reaches the age of majority, the funds in their custodial account are considered their assets and therefore could disqualify them from receiving government benefits,” says Briese. It is recommended to consider custodial accounts for children who do not rely on government or state support, to avoid losing benefits.

Other things to know are that deposits in a custodial account are irreversible and that once the account has been established, you can’t change beneficiaries. Also, when your child reaches adulthood, they gain full control of the account. It’s important to consider whether they are able to handle that responsibility.

There are two main types of custodial accounts:

Uniform Gift to Minors Act (UGMA): A UGMA custodial account allows financial assets to be gifted to your child, including cash, stocks, bonds, mutual funds, and securities, without needing to open a formal trust. UGMAs are available in all states.

Uniform Transfer to Minors Act (UTMA): A UTMA behaves similarly, but allows any type of financial or physical property. A parent can put their car or the deed to their house in a UTMA, for example. UTMAs are not available in all states.

Before you take the next step

It is recommended to consult with an experienced professional in special needs planning—you may wish to talk to both a financial advisor and a lawyer. “A financial advisor can help provide insight into investment strategies and personalized long-term planning, while a lawyer can help address legal matters, such as trusts,” says Briese. Having both will help you choose and manage whichever options are most financially beneficial for your child, your family, and your circumstances.

Couple holding documents, smiling, looking at financial advisor
Credit: iStock | Goran13

These individuals will understand how to navigate the nuances and complexities of your options, says Briese, as well as how they may affect government benefits and taxes. And, they will be up to date on any changes to laws that take place throughout your child’s life.

“Surrounding yourself with a team of financial professionals who you trust, and who have experience in dealing with the financial and emotional aspects of special needs planning, can help,” says Briese.

Parents of children with complex needs are already very familiar with building a care team. It may be time to add to the team—someone to care for your money. “Money can often be emotional. An advisor can help provide an unbiased perspective and can help parents stay focused on their long-term financial strategy.”


References and Further Reading

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