Parents want their children to be taken care of after they pass away. But children with disabilities have increased financial and care needs, so ensuring their long-term welfare can be tricky. Proper planning by parents is necessary to benefit the child with a disability, including an adult child, as well as assist any siblings who may be left with the caretaking responsibility.
Special Needs Trusts
The best and most comprehensive option to protect a loved one is to set up a special needs trust (also called a supplemental needs trust). These trusts allow beneficiaries to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). The trusts are drafted so that the funds will not be considered to belong to the beneficiaries in determining their eligibility for public benefits. The special needs trust can be created outright, as a stand-alone trust, or it can be made a part of the parent’s revocable living trust.
The two main types of special needs trusts that parents of young children (with special needs) that are generally utilized are:
- The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a firstparty special needs trust in that the assets held in the trust do not affect a beneficiary's access to benefits and the funds can be used to pay for the beneficiary's supplemental needs beyond those covered by government benefits
- A pooled trust is an alternative when there the parents do not have a trustee that they trust to take over. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources with those of other trust beneficiaries for investment purposes, while still maintaining separate accounts for each beneficiary's needs. When the beneficiary dies, the funds remaining in the account reimburse the government for care, but a portion also goes towards the non-profit organization responsible for managing the trust.
If you've established a special needs trust, a life insurance policy can pay directly into it, and it does not have to go through probate or be subject to estate tax. Be sure to review the beneficiary designation to make sure it names the trust, not the child. You should make sure you have enough insurance to pay for your child's care long after you are gone. Without proper funding, the burden of care may fall on siblings or other family members. Using a life insurance policy will also guarantee future funding for the trust while keeping the parents' estate intact for other family members.
An Achieving a Better Life Experience (ABLE) account allows people with disabilities who became disabled before they turned 26 to set aside up to $15,000 a year in tax-free savings accounts without affecting their eligibility for government benefits. This money can come from the individual with the disability or anyone else who may wish to give him money.
ABLE accounts cannot hold more than $100,000 without jeopardizing government benefits like Medicaid and SSI but can be used to pay for a host of qualified expenses. These accounts are best suited for those with special needs who are high functioning and would benefit from direct access to funds (as compared to a special needs trust where the money will always be held, managed and disbursed by a trustee).