Special Needs Financial Planning

Jon Elfin

February 07, 2020

In this article, You'll learn

Are you a parent or guardian of a special needs individual? Those of us responsible for loved ones with special needs take on the great responsibility of caring for our special needs loved ones throughout our lifetimes, and perhaps even more importantly - when we are gone.

This article is for anyone who takes care of a special needs loved one. The goal is to empower you with the knowledge of knowing how you can provide what’s best for your special needs loved one today, tomorrow, and far into the future.

We’re going to help you understand how a special needs planner can help you and your family, what a special needs financial advisor does, and examine the different programs, options, and benefits that are available.

Special Needs Planner - What is Special Needs Financial Planning?

At its core, special needs financial planning addresses the same financial planning considerations of all typical families. Your special needs planner will discuss retirement planning, investment strategies, insurance options, estate planning, and tax reduction.

However, when you have a special needs child, there is another layer of planning that is integrated with family financial planning. You will need to integrate the needs of your special needs loved one into your plan.

For example, when you’re planning for retirement you want to evaluate the probability of running out of money after considering assets, income, inflation, rates of return, and a number of other variables. When you have a special needs child, your financial planner will take the same approach but with the added variable of ensuring the security of your special needs loved one for the duration of their lifetime.

Additionally, your special needs planner will make sure you’re aware of all the public benefits and programs that are available for your special needs child, how to qualify for them and not lose them after qualifying. This is where a lot of people make mistakes. An experienced financial advisor will guide you through the entire process and structure a plan that maximizes benefits and ensures long term security. Let’s take a look at some of the major components that may go into your special needs financial planning strategy.

What is a Special Needs Trust? - Special Needs Financial Planning

A special needs trust is an irrevocable trust for the benefit of the special needs person. Because it is irrevocable, money put into that trust is not counted as a resource when determining means-tested benefits like supplemental security income (SSI).

The primary financial goal of a special needs trust is to ensure your loved one will continue to receive public benefits while having sufficient assets to support them for the duration of their lifetime.

Special Needs Financial Planning - What are the Different Types of Special Needs Trusts?

There are two general types of special needs trusts (SNTs).

First Party Special Needs Trust The money or assets that go into a First Party SNT come from the special needs person’s assets. An example might be if the special individual wins a liability lawsuit and is awarded a significant sum of money. In order to get the awarded amount out of their name so they can continue to qualify for public benefits, a First Party Special Needs Trust can be created to hold those assets.
Third-Party Special Needs Trust As the name implies, a Third-Party Special Needs Trust holds assets that originate from anywhere other than the special needs individual. For example, a parent might put money into a third-party special needs trust or may leave money at their death to a third-party special needs trust.

Important Difference! - Both types of trusts are effective, but the main difference is at the end of the special needs person’s life, money in a First Party Special Needs Trust must be used to pay back Medicaid or in California, Medi-Cal, to pay back any costs incurred from services.

For example, if there is $1 Million left in the trust when the special needs individual dies, and they spent $750,000 in Medicaid or MediCal benefits, $750,000 from the trust would be used to pay back Medicare/Medi-Cal. In a Third Party Trust, no payback is required.

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Special Needs Financial Planning - Do You Pay Taxes on a Special Needs Trust?

Yes, because it’s an irrevocable trust, money that’s in the trust will be taxed at a much higher trust rates than individual or joint rates. In an irrevocable trust, you hit the top bracket at a much lower threshold than you would if it weren’t in a trust. It’s a common misconception that the trust qualifies for a tax break.

For 2020, you reach the 24% tax bracket at $9450. You reach the 37% tax bracket at $12,950.

This may not be a big issue in practice because most often this is investment income. However, it is important to be aware of, particularly in a SNT that contains highly valued assets.

What Can Funds in a Special Needs Trust be Used For?

The funds in a special needs trust can be used for most things that support the special needs individual.

Education
Recreation & Entertainment
Travel
Assistive equipment (wheelchair)
Electronic equipment and appliances
Payments for companion assistants
Vehicles

The funds can be used for most things, but you should be careful. Using the funds on a particular resource can reduce the benefits the individual is receiving. See below for an example of this.

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Can a Special Needs Trust Pay for Housing?

Yes, an SNT may disburse funds to pay for housing. However, if the beneficiary of the trust is on SSI (Supplemental Security Income) your SSI benefit can be reduced by up to one third. This may be an acceptable trade-off as it may allow the special needs individual to live in a nicer home- just be aware that it can reduce his or her SSI.

How Does a Special Needs Trust Affect Medicaid?

One of the major benefits of utilizing a SNT is that it helps the special needs individual qualify for public benefit programs like SSI or Medicaid. Because Medicaid and SSI are considered “means based” programs, a special needs person’s assets and income affect whether or not they qualify. Trustees must be very careful to understand what asset and income limits are, and how SNT funds are disbursed, so that their special needs loved ones are not disqualified from these important benefits.

Who Qualifies for Special Needs Benefits?

Understanding if your child is considered “special needs” with regard to public benefits, typically starts with understanding The Individuals with Disabilities Education Act (IDEA). Some cases are more clear cut than others, but a criteria does exist to determine who qualifies as a special needs individual.

According to IDEA, the following may be considered disabilities: intellectual disabilities, hearing impairment including deafness, speech or language impairment, visual impairment including blindness, serious emotional disturbance, orthopedic impairment, autism, traumatic brain injury, and other health impairments.

When is the Best Time to Set up a Special Needs Trust?

In general, the sooner the better- you never know when you are going to die! But certainly, before the special needs individual turns 18. Even that may be too late as sometimes special needs individuals can qualify for benefits prior to age 18. Special Needs Financial Planning

Supplemental Security Income - How a Special Needs Planner Can Help You Maximize SSI Benefits

Who is Eligible for SSI?

SSI or Supplemental Security Income benefits are administered by Social Security Administration. SSI pays monthly benefits to individuals with limited income and resources who are disabled, blind, or age 65 or older. Blind or disabled children may also qualify for SSI.

How Much Does SSI Pay Per Month?

The federal maximum SSI monthly benefit is $783. Many states, like California, will provide a supplemental payment to certain SSI recipients. With California’s supplement, the max benefit is $953 per month in 2020.

What is the Household Income Limit for SSI?

A special needs person can’t have more than $2,000 dollars in their name, not including a house, car, and a few other things and qualify for SSI. Putting money into UGMA or UTMA in accounts for minors can result in disqualifying a special needs individual for SSI when they become 18. Assets the parent or guardian have in their name has no effect on the special needs individual’s ability to qualify for SSI.

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What is the Difference Between Social Security Disability and SSI?

Both SSDI and SSI are disability programs offering cash benefits for disabled individuals, but the eligibility requirements are very different, and they are two completely different government programs.

The main difference between Social Security Disability (SSDI) and Supplemental Security Income (SSI) is that SSDI is not “means based” and is available to workers who have accumulated enough work credits, while SSI disability benefits are means based and available for low-income individuals who have either never worked or haven’t earned enough credits to qualify for SSDI.

When a parent starts getting their Social Security retirement benefit, their disabled child will receive ½ of their benefit through the Childhood Disability Benefit Program (CDB). At this point, typically (though not always) the disabled child will no longer get SSI. When this happens, they will lose their Medicaid benefit - they have to reapply separately and usually will be able to get it reinstated. After two years receiving their CDB benefit, the disabled child will qualify for Medicare. Special Needs Financial Planning

ABLE Accounts - What are the Advantages of an ABLE Account?

Achieve a Better Live Experience (ABLE) accounts also known as a 529 ABLE or 529A account, is a state-run savings program for people with disabilities. They were brought into existence from the Achieving a Better Life Experience Act in 2014. It is the first account that a disabled individual can have in their name and not have it count as a resource for means based benefits.

Who Can Contribute to an ABLE Account?

Contributions to ABLE accounts can come from the disabled person’s assets or anyone else. They can control it themselves if they’re able to, and the money added grows tax-free and is distributed tax-free just like a College 529 account.

How Much Can Be Contributed to an ABLE Account?

$15,000 can be contributed annually from all sources. Note- this is different than a college 529 where contributions of $15,000 can be made from multiple sources. Additionally, a disabled person that has earned income and is not participating in in employer qualified plan like a 401(k), can contribute an additional $12,490 annually. Important note- account values cannot exceed $100,000 without impacting SSI - you can have up to $529,000 and still qualify for Medicaid/Medi-cal and some other means tested benefits.

What Can ABLE Account Funds be Used For?

An individual can use their ABLE account funds for anything that is considered a disability expense.

Basic Living Expenses
Health and Wellness
Housing
Financial Management
Transportation
Education and Training
Assistive Technology
Legal Fees

Big Benefit: An ABLE account can be used for housing and unlike a Special Needs Trust, it will not reduce your SSI.

Special Needs Financial Planning - Can I Have an ABLE Account and a Special Needs Trust?

Yes, and you probably should.

Who is Eligible to Open an ABLE account?

The ABLE Act limits eligibility to individuals with significant disabilities that started before turning age 26. Special needs persons that meet the age criteria and are also already receiving benefits under SSI are automatically eligible to open an ABLE account.

If a special needs individual is not receiving SSI or SSDI, but still meets the age requirement, they may still qualify to open an ABLE Account if they meet the Social Security’s definition and criteria regarding significant functional limitations and receive a letter of certification from a licensed physician.

What Happens to ABLE Account Funds after Death?

Upon death, the state may file a claim to all or a portion of the funds in the account equal to the amount in which the state spent on the beneficiary through their state Medicaid program. This is known as a “Medicaid Payback” as we mentioned earlier when discussing first party special needs trusts. Note- there are some state ABLE accounts (like California) that do not require a Medicaid/Medi-cal payback at death. Special Needs Financial Planning

SSDI - What you Should Know About Social Security Disability Insurance

Social Security Disability Insurance (SSDI) is a program that offers monthly payments to people under age 65 who have qualifying disabilities and sufficient work credits.

Who is Eligible for SSDI?

To qualify for SSDI, individuals must have held qualifying employment for a specific period of time. Qualifying employment is any employment that pays into the Social Security System. In addition to work credits, individuals must be able to prove that they suffer from a totally disabling condition that prevents them from working.

Social Security defines a disabling condition as one that prevents individuals from doing the work they did before becoming disabled, prevents individuals from doing other work despite disability, and has lasted or is expected to last at least 12 months or end at death. SSDI does not provide any benefits for partial or short-term disability.

What Are the SSDI Means and Severity Tests?

SSDI Means Test To meet the Social Security Administration’s definition of disability, individuals must first either be totally unable to work or be working but unable to earn more than $1,070 every month. The income limit is adjusted periodically, so before applying be sure to find out what the current income limit is set at to ensure eligibility.
SSDI Severity Test The SSDI severity test relates to the severity of a person’s disability. Regardless of diagnosis, SSA will pay individuals Social Security disability benefits under SSDI only if their condition interferes with basic work-related activities to the extent that they are unable to make a living.

How Long Does SSDI Last?

Once an individual is approved for SSDI your case is categorized into one of three categories:

Medical Improvement Expected (MIE)
Medical Improvement Possible (MIP)
Medical Improvement Not Expected (MINE)

Whichever category an individual falls into will determine when they will receive eligibility reviews which will ultimately determine how long their SSDI benefits last.

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When is My SSDI Eligibility Review?

Whether an individual was placed into the MIE, MIP, or MINE category will determine when they will need to have an SSDI eligibility review.

MIP case reviews are every 6-18 months
MIP case reviews are every 2-5 years
MINE case reviews every 5-7 years

How Much Money Can You Have in the Bank on SSDI?

There is no asset limit for SSDI. You can have as much money in the bank and as many assets as you like. Remember, SSI, on the other hand, has a total asset value limit of less than $2,000. SSI is a needs based program, where SSDI is a benefit that workers pay into before receiving.

What is the Limit on SSDI Benefits?

The estimated average Social Security disability benefit amount for a disabled worker receiving SSDI as of late 2019 is $1,237 per month. The benefits are based on average lifetime earnings, not on household income or how severe a disability is. The total amount a disabled worker and his or her family can receive is 150% to 180% of the disabled worker’s benefit.

Can SSDI Benefits Be Taken Away?

If a person returns to work while receiving SSDI benefits, the Social Security Administration will want to determine if you are engaging in what’s called “substantial gainful activity” (SGA). The biggest factor in determining this is how much the individual is getting paid. In 2019, individuals earning more than $1,220 per month were considered over the SGA limit.

In most cases, a person can work up to nine months during a trial work period without causing their SSDI benefits to stop, regardless of how much they’re making. At the end of the trial work period, if they continue to work, and exceed the SGA level, they will no longer be considered disabled and their SSDI payments will stop.

What Happens to SSDI Benefits at Retirement Age?

SSDI recipients who reach full retirement age (66) will see their disability benefits stop because individuals cannot receive both SSDI and Social Security retirement benefits at the same time. If an individual is receiving SSDI benefits and reaches age 66, their SSDI payments will end and Social Security retirement benefits will kick in. Special Needs Financial Planning

Special Needs Limited Conservatorships - When is a Limited Conservatorship Needed?

There are two primary types of limited conservatorships:

Limited Conservatorship of the Person A court arrangement where a conservator cares for and protects a developmentally disabled adult and provides for their needs associated with daily life.
Limited Conservatorship of the Estate A court agreement where a conservator handles a developmentally disabled adult’s financial matters, like paying bills and collecting income.

Who Decides if an Adult is Developmentally Disabled?

Applying for conservatorship is a court process. The court will ultimately determine whether an individual can be conserved, and may require some type of proof. This typically may come from medical records, school records, or in California information from the Regional Center.

When Should You Apply for a Limited Conservatorship?

If someone is significantly disabled and you feel like they need to be conserved, you should start this process two or three months before they turn 18. If they turn 18 and they are not conserved, technically you can’t make certain decisions for them that you have made throughout their lifetime, for example you can’t make medical decisions for them. This could be a big deal for people that don’t have capacity. However, you can establish a limited conservatorship at any time after the person has reached age 18.

Who Can be a Conservator?

Conservators are usually parents, siblings, or relatives, but any responsible adult can act as a conservator. Additionally, there can be more than one limited conservator.

What Kind of Decisions Can a Limited Conservator Make?

A limited conservator’s duty is to help the conservatee develop maximum self-reliance and independence. Because developmentally disabled adults may be able to do many things on their own, the judge will only give the limited conservator power to do the things the conservatee cannot do without help. After the court hearing, the conservator will receive a list of the exact areas (powers) in which the limited conservator is authorized to act.

What Powers Can a Limited Conservator Ask For?

A limited conservator may ask for the following 7 powers:

Power to repair the conservatee’s residence or dwelling
Access to the conservatee’s confidential records and documents
To consent or withhold consent to marriage on the behalf of the conservatee
Enter into contracts on the behalf of the conservatee
To give or withhold medical consent
Selection of the conservatee’s social and sexual contacts and relationships
Educations decisions

What Are the Primary Responsibilities of a Limited Conservator?

Limited conservators must provide:

Food
Clothing
Shelter
Well-being

How Long do Conservatorships Last?

A limited conservatorship lasts for the lifetime of the conservatee or the lifetime of the conservator. If court investigator’s report or other information suggests that one or more conservators are not acting in the best interest of the conservatee, the judge can issue an order to show cause, and after a hearing, the conservator can be removed and replaced.

Conclusion and Takeaways - Special Needs Financial Planning

If you made it this far, you’re probably seriously considering taking action to establish or update your special needs financial planning. As you can see, there are a lot of moving parts and variables to consider. Everyone’s situation is unique and requires a customized plan to solve their issues and meet their objectives.

When you’re responsible for a special needs person, it can be daunting and is often a lifetime commitment. It’s not easy, but taking the right steps and doing the proper planning are instrumental in providing the best life possible for your loved one and providing peace of mind for yourself.

A quick recap....

Terms to Understand

Special Needs Trusts
SSI (Supplemental Security Income)
ABLE Accounts
SSDI (Social Security Disability Insurance)
Limited Conservatorships

Special Needs Financial Planning