Planning for special needs is one area that is often overlooked by advisors—either because the advisor’s clients currently don’t require a plan for a special needs individual or because the client himself isn’t aware of the planning options that exist. 

Regardless, recent data shows that as many as one in five individuals will face the need for special needs planning in their lifetime. Because of the moving pieces involved in coordinating available public resources and private planning tools, it is especially important that the financial advisor be informed to help clients maximize the value of their planning dollars and take advantage of newly available tax-preferred savings vehicles specifically earmarked for special needs planning.

Savings Impact on Social Security

Generally, unless a disabled person has access to specifically designed trust vehicles, he or she is disqualified from receiving Social Security disability benefits after accumulating assets worth more than $2,000 (income restrictions also apply to restrict monthly income to $1,170 in 2017, though the amount is higher if the disability is blindness).

Importantly, assets held in qualified special needs trusts are not counted toward the Social Security asset threshold. Qualified special needs trusts must be established for the benefit of disabled individuals who are under age 65. These trusts are generally established and funded by a third party (such as a parent or other family member) and are entitled to claim the higher personal exemption that is available to individual taxpayers (these rules may change if the personal exemption is eliminated through proposed tax reform).

(Related: Social Security Working Retirement Tax: Which Spouse’s Earnings Count?)

Many of the tax preferences that apply to ABLE accounts (discussed below) are not available through the use of a qualified special needs trust, but the $100,000 ABLE account cap does not apply. This allows the client to fund the trust with sufficient assets to meet the needs of the special needs individual without jeopardizing his or her ability to claim government benefits.

Self-settled (self-funded) special needs trusts can also be used to hold assets that are owned by the special needs individual (for example, personal injury settlement awards or inheritances) in order to maintain eligibility for government benefits.

Potential Benefits of ABLE Accounts

ABLE accounts were created by the Achieving a Better Life Experience Act to allow individuals to accumulate up to $100,000 in “ABLE accounts,” which are modeled after Section 529 college savings accounts, without becoming disqualified from receiving Social Security benefits.

Using an ABLE account, an individual can take advantage of tax-free account growth and save a total of $102,000 (when the $2,000 Social Security threshold is included) without risk of disqualification from receiving Social Security benefits. If Social Security benefits are not needed, some states allow an individual to accumulate up to $500,000 in an ABLE account on a tax-preferred basis.

Medicaid benefits are subject to different rules and are not impacted regardless of how much the individual deposits into the ABLE account. Despite this, a Medicaid clawback provision applies to require that any assets remaining in the account after the beneficiary’s death be used to repay Medicaid benefits provided to that individual.

In order to qualify as an ABLE account beneficiary, the individual must be blind or diagnosed with a disability that causes severe limitations, before that individual reaches age 26. Individuals who are currently receiving Social Security disability benefits also qualify.

Currently, the annual ABLE account contribution limit is $14,000 (the gift tax annual exclusion amount, which will increase to $15,000 in 2018) in order to avoid gift tax liability. The ABLE account beneficiary is also entitled to contribute to his or her own account.

Only one ABLE account may be established per beneficiary, and distributions used to fund expenses related to the individual’s disability are received income tax-free. The definition of what constitutes an expense related to the disability is very broad and, for example, includes housing (rent, property taxes, a mortgage, etc.), education and legal expenses, making these accounts particularly valuable in planning.

Conclusion

For clients with special needs children or relatives, planning for these individuals’ futures can be one of the more challenging aspects of creating an overall financial plan—but with the help of an experienced advisor who is well-versed in the available options, creating a plan that does not jeopardize government benefits is possible.

For previous coverage of trust planning for children in Advisor’s Journal.

For an in-depth analysis of disability planning in general, see Advisor’s Main Library.

Your questions and comments are always welcome. Please post them on our blog, AdvisorFYI, or call the Panel of Experts.