Learn how to protect your child's disability benefits as part of the special needs planning process.
Disability benefits are hard to get and easy to lose. Last Week Tonight with John Oliver host John Oliver quipped during a 2024 segment on disability benefits that about 48,000 individuals filed for bankruptcy while awaiting a final decision about their disability appeals.
John goes on to feature several disabled individuals sharing their experience of being outright denied or losing essential government benefits based on “the incredibly stringent rules that we force those who receive these benefits to live by… {such as] aggressive caps on income and savings.”
Disabled individuals must not exceed certain account thresholds or else they risk losing benefit eligibility–effectively removing the ability to save for the future.
So, how can individuals with special needs pay for necessary housing, medical, and day-to-day living while also tucking away necessary savings for emergencies? Without proper special needs planning, even well-intentioned gifts or inheritances can jeopardize these essential resources.
Thankfully, there are powerful tools designed to help ensure financial security while preserving access to disability benefits. In this blog, we’ll explore these tools and how they can safeguard your loved one’s future.
Government programs such as Supplemental Security Income Income (SSI) and Medicaid provide crucial financial support, but they come with strict eligibility requirements. Any financial windfall—whether it’s a gift, inheritance, or poorly managed savings—could disqualify a person with special needs.
The key lies in special needs planning. Special needs planning goes beyond having visibility into the monthly allowable income limits. It’s a cohesive strategy that allows families to protect benefit eligibility while establishing long-term security and financial support for supplemental needs.
Special needs planning isn’t just about protecting assets either—it’s about providing peace of mind for you and your child. It ensures they receive the care, support, and opportunities they deserve without risking the benefits that are essential to their well-being.
A Special Needs Trust (SNT) is one of the most effective tools for protecting disability benefits. These trusts are specifically designed to prevent individuals with disabilities from exceeding asset thresholds while still allowing them to benefit from additional resources.
An SNT can hold assets for the benefit of the individual without affecting their eligibility for government programs and can help pay for supplemental needs, like medical expenses, special equipment, home care, education, or recreational activities.
There are different types of SNTs, including first-party, third-party, and pooled trusts, each serving distinct needs and circumstances. For example, if you are preparing to leave an inheritance to a special needs child who will be on government benefits, you would want to create a third-party special needs trust to receive inheritance. This would exclude the inheritance from the child’s estate and prevent it from being a countable asset that would prevent your child from receiving social security benefits. It is important to work with an attorney who specializes in special needs planning to establish the appropriate type of special needs trust.
If you are in the early stages of special needs planning and have not yet established an SNT, here is a helpful resource on how to set up a special needs trust.
Another valuable tool is the Achieving a Better Life Experience (ABLE) account. ABLE accounts are oftentimes used in conjunction with special needs trusts to allow the special needs individual to receive financial support. This is because the government has stringent rules about the type of financial support that can be provided by a special needs trust. To help remedy this, the government created ABLE accounts. These accounts are essentially savings/investment accounts that allow individuals with disabilities to maintain financial independence without jeopardizing their benefits.
Funds deposited in an ABLE account can be used for qualified disability expenses, such as education, housing, and transportation. The government’s definition of what constitutes a qualified disability expense is intentionally broad. This allows the special needs individual to receive distributions from the ABLE account and cover expenses that a SNT would avoid paying for. Contributions to ABLE accounts are not considered income and do not impact SSI or Medicaid eligibility, provided certain conditions are met.
For 2024, the maximum annual contribution limit for an ABLE account is $18,000. Be mindful, however, of Medicaid clawbacks, or claims made by Medicaid to recover funds from the ABLE account following the beneficiaries’ death.
An Inherited IRA is a retirement account passed to a beneficiary upon the death of the original IRA owner. Instead of being directly transferred, the account retains its tax-advantaged status, and distributions must follow specific rules based on the beneficiary’s relationship to the decedent and age.
If an individual with special needs is named as a direct beneficiary of an IRA, it could unintentionally jeopardize their government eligibility as distributions from the IRA could be considered income or countable assets.
To avoid this, the IRA owner should consider designating a third-party SNT as the beneficiary of the IRA. The SNT can then manage and distribute funds in a way that maintains the beneficiary’s eligibility for benefits.
This is an excellent tool for parents or grandparents of a special needs individual who are interested in passing down an inheritance in a tax-efficient manner.
Legal designations, like guardianship and power of attorney (POA), are integral elements of special needs planning. These legal arrangements ensure that decisions regarding financial and personal matters are made in the best interests of the individual with special needs.
Guardianship is a court-appointed arrangement that establishes decision-making authority on behalf of an individual, while POA is a legal document that authorizes an individual to act on another individual’s behalf, like paying bills, managing finances, and filing tax returns.
Establishing guardianship or POA can help manage assets effectively, maintaining compliance with benefit requirements.
While not entirely financially focused, a Letter of Intent (LOI) provides a roadmap for future caretakers, trustees, or guardians documenting critical information about your loved one. This can include medical, financial, and personal details, like day-to-day care instructions, housing arrangements, or financial resources.
Though this customizable document is not legally binding, it does provide peace of mind for parents or caretakers of loved ones with special needs to ensure their unique needs and preferences are carried out – including do’s and dont’s of financial accounts and planning.
In addition to the financial strategies, it is essential to stay informed on current policies and regulations regarding disability benefits. Changes in laws or eligibility criteria happen rapidly, like California’s elimination of asset limits for their state-based Medicaid program, Medi-Cal. Regularly consult with legal and financial professionals specializing in special needs planning to provide you with up-to-date information and tailored advice.
Special needs planning involves complex legal, financial, and tax considerations. Working with professionals–such as estate planning attorneys, experienced financial advisors, and tax experts–ensures your plan complies with the law and meets your loved ones needs.
Special needs planning can be emotionally and financially overwhelming. The right financial advisor can provide clarity and peace of mind by breaking down complex decisions into more manageable actions, in turn reducing stress for you and your family.
Be wary though of financial advisors who do not have experience with special needs planning. Not all financial advisors have experience with these types of trusts or accounts or understand the complexities of government program eligibility. You can search online advisor databases, like National Association of Personal Financial Advisors (NAPFA), and filter to only those advisors who offer special needs planning within your area or on a national level.
By using tools such as SNTs, ABLE accounts, and appropriate legal arrangements, you can help ensure financial security and continued support.
If you’re ready to start planning, consult with a Prudent Investors advisor to explore your options. Whether it’s setting up a special needs trust, opening an ABLE account, or creating a comprehensive estate plan, the right tools can make all the difference.
Investment advice through Prudent Investors, an SEC-registered investment advisor. This blog is general communication being provided for informational purposes only. This information is in no way a solicitation or offer to sell securities or investment advisory services. It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy. This does not contain sufficient information to support an investment decision. Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest. Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved. No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Prudent Investors. Prudent Investors does not provide legal or tax advice. Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.
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