If your young adult child has an established disability determined by Social Security they may qualify to receive government financial assistance in the form of SSI or SSDI. While the amount is meager, $750 per month for SSI in 2018 for example, it is supposed to provide “eats and sheets” or food and shelter. There are few areas of our country where that is enough to provide those basics let alone resources for clothes, entertainment, hobbies, therapeutic services and more that lead to quality of life. For those individuals that can work, their monthly income cannot exceed an annually indexed amount ($1,585 in 2018 for SSI) without compromising government benefit eligibility.
The additional benefits of Medicaid and Medicare which accompany SSI and SSDI respectively provide vital health care coverage.
As parents, we attempt to provide all we can to groom all our children to lead successful, independent lives. However, for our children with disabilities, we must take a different approach to support them in their version of independent living even if we predecease them. That typically means providing and then carefully managing additional financial resources for their benefit for their entire lives. It is imperative to know how to do so without jeopardizing eligibility of government benefits.
Special Needs Trusts
Special Needs Trusts, also known as Supplement Needs Trusts, are designed to receive and administer assets for the benefit of the individual with a disability. If drafted and administered correctly the trust assets will not disqualify the trust beneficiary from means-tested benefits. The beneficiary continues to receive the public benefit and has access, via the trustee’s discretion, to the trust assets that help improve the quality of their life, even long after the parents’ death.
Distributions from Special Needs Trusts are meant to supplement not supplant means-tested public benefits.
There are 4 valuable tools to consider:
First Party Trust (aka Payback Trust, D4A Trust, Self-settled Trust)
When your child has money in their own name, regardless of sources such as inheritance, gift or settlement, it is considered a resource for qualification calculations for SSI and Medicaid. To qualify for public benefits the resource limitations are only $2,000 in assets outside of a house or car. Any excess assets owned by the child has to be either spent or contributed to this type of trust to be able to initially qualify for or remain qualified for government resources.
Establishing a First Party Trust is considered a reactive step to maintain SSI and Medicaid eligibility. This type of trust must be established by a court, parent, grandparent or guardian. A trustee, which can be the parent, manages these assets for the benefit of the child to provide such support as the purchase of a home, modifications to the home, buying a car or furniture, paying medical expenses not covered by Medicaid, or paying for entertainment and recreation to name just a few eligible distributions.
Importantly, as one of the trust names implies, at the death of the beneficiary, the trust must reimburse Medicaid for medical assistance provided to the beneficiary over their life. If any money is left in the trust after this reimbursement, it may be passed on to heirs or beneficiaries.
Third Party Trust
These are commonly used by families acting proactively who want to provide resources that have never been owned by the child, to supplement government benefits and provide improved quality of life. One form is created under a will and only comes into existence at the death of that parent or other caring family member. This trust is then funded with inheritance and/or life insurance death proceeds.
If multiple donors wish to fund the trust it will be created as a stand-alone SNT, outside of a will. This trust should be established if there is a belief that loving and generous friends and extended family members may provide gifts to your child while they live or might name your child as a beneficiary at their death. These kind friends and families should be notified that any assets meant for the benefit of your child should be directed to the trust instead of given as an outright gift. They may not realize their well-meaning intentions may cause a significant problem with your child’s government benefit eligibility.
Assets are managed by a trustee that can be a family member such as a parent or sibling, trusted friend, and/or a corporate trustee for the benefit of the child for the remainder of the child’s life. Often the involvement of corporate trustee is considered as a thorough understanding of distribution rules is imperative in successfully integrating these with government benefits. For most families, the assurance of maintaining government benefits as a financial and health care foundation is vital. A miss-step with a trust distribution can jeopardize these.
With Third Party Trusts, at the death of the beneficiary, a Medicaid reimbursement is not required and residual trust assets can be distributed to any beneficiaries such as surviving children, siblings or parents.
This type of SNT is a useful planning tool for people who want to set aside property for a beneficiary with disabilities, preserve essential public benefits during that beneficiary’s lifetime, and remain in full control of where all the remaining SNT assets will go upon the beneficiary’s death.
Pooled Trust (aka D4C Trust)
This can be funded with your child’s assets or from a third party. Non-profit organizations establish and managed pooled trusts and may serve as a trustee or co-trustee. (In Colorado the only pooled trust is administered by the Colorado Fund for People with Disabilities (CFPD).)
As the name implies, assets are pooled from multiple individuals with disabilities to create a larger amount of capital to invest. The organization maintains a separate trust “sub-account” for each participant. A pro-rata share of the entire pooled trust is available for everyone.
Like the other two trusts previously discussed, assets in these “sub-accounts” are not deemed as resources for public benefits eligibility. Interestingly, the person with the disability can join the trust on their own behalf. As mentioned above, a First Party or Third Party Trusts dos not allow this. However, as with the others a court, family member or guardian can establish this pooled trust as well.
Some organizations have care coordination programs which directly deposit investment proceeds from the pooled trust to pay for services for the beneficiary. These services may include health and dental procedures not covered by Medicaid, rehabilitative and occupation therapy, home care, etc.
The trust will continue to provide distributions until the account is depleted or the beneficiary dies. When your child dies there is a Medicaid payback requirement with any residual assets remaining within the pooled trust to help support other pool participants.
ABLE, or A Better Life Experience account is a subsection of IRS code section 529. In fact, a 529A account provides similar tax-advantaged savings for children with disabilities as it’s college funding cousin, 529 College Plans, do for college-bound siblings. Founded in 2014, with Colorado’s plan inaugurated in 2017, this account may be used in isolation or to supplement the use of any of the trusts discussed above. Contributions can come from the child or any third party and can be invested in cash or investment accounts. Earnings accumulate tax-deferred and are tax-free if distributions are used to meet qualified expenses. This “qualified” definition is broad and essentially allows ABLE account assets to be used to enhance the quality of life for the beneficiary but only supplement and not supplant government benefits.
Importantly, the value of this account is not considered a resource for means-tested benefits.
ABLE accounts are a wonderful additional tool available to allow our children to learn the valuable lesson of saving for a raining day. There are, however, limits to the amount that can be contributed with 2018’s limit at $15,000. (If your child has earned income they can set aside another $12,060.) Only one ABLE account per child is allowed and to qualify the child must have been diagnosed with a disability prior to age 26.
This cost-effective planning tool does require Medicaid payback if assets are still held in the account when the child dies. Therefore, ABLE accounts are not the best choice for larger accounts.
Planning for a successful, happy and financially secure life for our children with disabilities can be complicated but with knowledge of strategies and tools available, the task can become manageable.