Monday, 15 May 2017
Most parents worry about how they're going to pay for their children to attend college. Meanwhile, parents of physically and developmentally disabled children may be faced with finding a way to provide for a lifetime of specialized care — even after they pass away and leave their children behind.
“You actually learn to adapt to the daily challenges of raising a special needs child," said a mother with an 11-year-old son with autism. “It just becomes who you are, what you do, and you get on with life. But the fear of who will take care of my child after I am gone is truly terrifying. It's the greatest worry of my life."
But there are several specific ways for parents to save and plan for the long-term care of their child, including Special Needs Trusts and ABLE Accounts.
Special Needs Trusts, also known as Supplemental Needs Trusts, were established by Congress in 1993 and allow parents or guardians to set aside unlimited assets to be held in trust for the benefit of the disabled child.
The primary benefit of a Special Needs Trust is that assets held in the trust cannot disqualify disabled individuals from receiving government benefits. This is important because in order to qualify for some government benefits — including Supplemental Security Income (SSI) and Medicaid — the disabled individual cannot have more than $2,000 in assets.
But even if a disabled individual is the beneficiary of a Special Needs Trust with several millions of dollars in assets, they can still qualify for government benefits.
However, it's important to note that Special Needs Trusts are very specific legal arrangements and there are many restrictions on how the funds in the trust can be spent. For example, funds cannot be used for food or housing. To ensure the beneficiary is properly protected and receives the maximum benefits from the trust, it's highly advisable they're drafted by an attorney and administered by a trustee with expertise in this area.
The main goal of these trusts is to pay for care and services not paid for by government benefits — thus the name "Supplemental Needs Trust." For example, if the beneficiary receives government benefits that cover half of their living and care expenses, funds from the trust are to be used to cover the remainder of the costs.
Special Needs Trusts also provide some extra layers of financial protection for the beneficiary. For example, they must be irrevocable — meaning they cannot be changed or terminated without the approval of the beneficiary — as opposed to a revocable trust, which can be altered by the person creating it.
In addition, assets held in Special Needs Trusts are protected from creditors or most types of legal judgment. Therefore, if the disabled is ever sued, the funds in the trust are protected.
You can establish a Special Needs Trust for a disabled person any time prior to their 65th birthday. It is highly recommended this type of trust be established sooner rather than later for a child, as you can fund the trust over time. Many parents establish Special Needs Trusts as part of estate planning, and these trusts are often the beneficiary of parents' life insurance policies.
Keep in mind that there are no direct tax benefits associated with Special Needs Trusts. However, because of the long-term financial protections they offer the beneficiary, these trusts are a widely used planning tool for many parents with disabled children.
The Achieving a Better Life Experience (ABLE) Act, which was signed by President Obama in December of 2014, allows tax-advantaged savings accounts similar to 529 education savings plans to be established for disabled individuals.
The details of ABLE Accounts, according to the recently passed law, are as follows:
Accounts can be established by anyone — family member, caregiver, or friend — in the name of the disabled individual. The beneficiary must meet the Supplemental Security Income (SSI) disability standard, and has to have become disabled prior to age 26. Only one ABLE Account can be established per beneficiary.
However, all earnings and distributions from the account are not subject to income tax, which is one of the attractive features of an ABLE Account.
Another important feature is that assets in the ABLE Accounts of under $100,000 cannot disqualify the beneficiary from receiving government benefits like SSI and Medicaid.
ABLE Accounts do not have the same rigid restrictions as Special Needs Trusts, and funds from an ABLE account can be used for qualifying disability expenses including:
Funds from an existing ABLE Account can be rolled over into another ABLE Account for the same beneficiary or another qualifying family member. Plans should be made for any unused account funds because if they are not rolled over, Medicaid can claim some of funds as reimbursement for benefits received by the beneficiary.
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