In 2009 my youngest child, Ethan, was born with Down Syndrome. As any family of a loved one with special needs will tell you, at the moment of awareness a whole new dimension of parenting opens and the learning curve is immediate and steep.
A whole new realm of financial concepts are also part of the learning curve. Financial planning for families with special needs individuals can seem a bit counter intuitive, but in order to best steward family resources for the benefit of all family members, certain concepts must be learned. These concepts are now an integral part of my practice at Oak Partners.
A disability diagnosis opens the door to many government benefits which can be critical to the disabled individual’s quality of life. In Indiana, government benefits for children can include health care, developmental therapies and respite services to the family. For adults, benefits may also include job training, day services, supported living and housing. Social Security may also provide income benefits.
These programs are administered and funded through Medicaid. For children’s services, eligibility is based on the disability diagnosis, but for adults, eligibility can involve both the diagnosis of disability and an evaluation of financial need.
While a full review of the rules regarding financial need are beyond the scope of this column, for discussion purposes, the government requires individuals to have less than $2,000 in assets to remain eligible for a number of programs. This requirement can present a whole host of challenges to families. Fortunately with some smart planning, and some special tools, government requirements can be met and families can still provide resources to enhance their loved one's life.
In the area of special tools, there are four planning tools that are most commonly used.
The first is the ABLE account. This cousin of the 529 college savings account enables a disabled individual to save money in a tax-preferred manner. The balance in an ABLE account does not count toward the $2,000 rule. While ABLEs do involve some details to learn about, these accounts are easy to set up and cost effective to manage. We use Ethan’s ABLE account to save family gifts (birthdays, holidays) and we put money in monthly as well. When Ethan reaches adulthood, his ABLE will serve as his education, lifestyle and travel fund.
Two types of trusts, called supplemental needs trusts, are commonly used in planning as well. Self settled trusts are funded by the disabled individuals assets such as excess income, inherited assets or insurance settlements. Self settled trusts function somewhat similarly to ABLE accounts and will involve a trustee who is charged with managing trust assets for the benefit of the disabled beneficiary.
The other trust type is a third party trust. Third party trusts are funded by assets not directly belonging to the disabled individual, usually inheritances, that are directed to the trust for the individual’s benefit. This is the more common type of trust used by families, and will also involve a trustee. Assets held in a third party trust are often directed back to other family members upon the death of the disabled beneficiary, while assets held in a self settled trust or ABLE account are directed to reimburse the state.
A fourth type of trust, called a pooled trust, is set up by a specialized institution, which also serves as the trustee, to pool the assets of disabled individuals together in a unified management structure. A pooled trust may be attractive to families that do not have a suitable or willing trustee. Assets in a pooled trust are also directed to reimburse the State at the disabled individuals death.
I won’t deny these planning concepts can seem confusing, but the one concept that is not confusing is that some planning must be done. Losing benefits due to lack of planning can be very stressful for the disabled individual, and the family members who have to fix the situation. The best way to start this process in most families is simply to talk about the issue.
Before investing in an ABLE plan, consider whether your state offers an ABLE program that provides residents with favorable state tax benefits. Consult a tax professional for more information. ABLE accounts may be protected from creditors if you invest in your own state’s program, depending on the state. Oak Partners and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation.
Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
