by M & L Special Needs Planning:
Financial planning for families with special needs is difficult under the best of circumstances. As parents of individuals with disabilities, we know that every one of our decisions has long-lasting ramifications that can have a huge impact on the quality of our children’s lives in the future. We also know that our choices now may mean the difference between our children living successfully, with financial independence, and watching them languish on wait lists, fighting to access benefits, services, living options, etc.
There are tools that families with special needs can utilize to help them financially prepare for the future. In our opinion, however, these tools aren’t nearly enough to help these families fill the gap between savings and expenses. The resource limits enforced by the government benefit programs – the current limit is $2000 – also makes it difficult for individuals to save. (Note: for more information about resource limits and government benefits, please click here.) In the past, the only legal way to save money without jeopardizing eligibility for these benefits was the Special Needs Trust. On December 19th, however, President Obama signed the ABLE Act into law thereby providing individuals with disabilities with one more option to help them save – the ABLE account.
Since the ABLE Act became law, there has been a lot of chatter in the special needs community regarding which savings method – the ABLE account or the SNT – is the best option. It goes without saying that the more financial tools available for individuals with disabilities, the better. As each family has its own set of financial circumstances, however, there are cases where one of these tools may be more beneficial than the other. Please join us today as we examine the ABLE Account and the SNT, and provide you with an analysis of the pros and cons of each.
The Special Needs Trust (SNT) – What is it?Essentially, the Special Needs Trust (SNT) – which is established by placing funds and other assets under the control of a trustee – is a legal document that is designed solely for the financial protection of an individual with a disability. As mentioned, until the ABLE Act became law it was the only legal way to save money without sacrificing eligibility for government benefits. It is also important to note that the funds in the special needs trust supplement but do not supplant government benefits. In other words, the special needs trust is designed to provide financial assistance for any care above and beyond what the government provides.
There are a number of ways in which the Special Needs Trust can be funded, either during the lifetime of the grantor, or upon their death. The trust allows family members to gift assets and leave inheritances or life insurances to a person with special needs without disqualifying him or her from government benefits. There are three distinct types of Special Needs Trusts: third party/supplemental trusts, first party/pay-back or self-settled/d(4)(A) trusts, or pooled Special Needs Trusts. Most Special Needs Trusts are third party/supplemental special needs trusts, unless the assets were originally in the beneficiaries’ name or there are not enough assets to pay the fees to establish the third party special needs trust.
The ABLE Account – What is it?
The ABLE (Achieving a Better Life Experience) Act is a piece of legislation that allows individuals with disabilities to open special savings accounts for disability-related expenses. This legislation, which builds on the already existing 529 college savings accounts, ensures that all funds in this account can grow tax free as long as the funds are used for qualifying expenses such as education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention, and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and any other expenses approved under regulations.
Most importantly, the funds in this account do not count towards the asset/resource limit established by means-based benefit programs such as Medicaid and Supplemental Security Income. As with the SNT, the funds in these accounts are intended to supplement not supplant, government benefits. As the law is less than a month old, the ABLE accounts are not yet available. Each state has to write and release ABLE account regulations – financial experts predict that some states will release these regulations by the end of 2015, with the majority of following in 2016.
SNT vs. Able: Which is right for you?
The important thing to remember when trying to decide between the ABLE Account and the Special Needs trust is that both of these savings vehicles are intended to work the same way: to give individuals with disabilities the ability to save without losing their means-based assets. The personal financial situation of the individual will determine which option is the most beneficial.
Let’s examine the Special Needs Trust first. To begin, the SNT is costly and complicated to establish; if designed incorrectly, the SNT can actually render the beneficiary (individual with a disability) ineligible for the benefits. In addition to this, picking the correct SNT form is very important – for example, the pooled SNT (often chosen to minimize the management fees) has a payback provision either to the state for Medicaid expenditures or to the non-profit. The First Party – also known as a Medicaid Pay Back trust – contains a payback provision for state Medicaid only. Only the third party form does not have any pay back provisions. If you choose the SNT, it is of the utmost important to consult with a professional who has experience with the SNT, and special needs finances and legal issues in general. On the plus side, there is no contribution limit for the SNT – if the individual receives a legal settlement, a gift from an estate, or regular contributions from the grandparent of other family member these funds can be deposited in the SNT tax-free. As well, if the beneficiary dies the funds in the SNT – specifically the third party special needs trust – will be released to family members and not back to the government.
The ABLE Account is undoubtedly easier to establish than the SNT; the funds can grow tax free within the account, and it is less costly. Additionally, an individual with special needs can manage this account him/herself. On the negative side, the ABLE Account beneficiary must have had the disability before the age of 26; this eliminates anyone who sustained an injury or became disabled after that age. The current contribution limit for the ABLE Account is 14,000 per year, up to a limit of 100,000. Anything over this limit will disqualify an individual from Social Security Insurance. As well, all ABLE accounts will have a Medicaid payback provision, meaning that if the beneficiary dies, the funds in the ABLE account will be used to pay Medicaid for services rendered during the lifetime of the beneficiary before being released to family members.
As you can see, the benefits and disadvantages of the ABLE and the SNT will differ for each person/family, depending on the individual’s circumstances. If you would like help determining whether or not the ABLE or SNT is the right choice for you, please contact us! We are experienced financial planning professionals, and will be able to analyze your situation to help you determine the right choice.
Would You Like More Information? Thank you all again for joining us today! We would like to take this opportunity to remind you all that making financial decisions that affect the future of your family (such as choosing a savings vehicle such as the ABLE account or SNT, for example) can be difficult, overwhelming and stressful. If you are unsure of how to begin saving for the future of your family, you should consult with a financial professional, ideally one who is familiar with the complexities of special needs finances.
We offer many services at M&L Special Needs Planning, LLC. All of our services are designed with you – a parent or loved one of an individual with a disability – in mind. We have personal and professional experience navigating the tricky world of special needs finances – give us a call and let us put that experience to work for you.