They grow up so fast, don't they? And all of a sudden we are older and need to start thinking about what will happen to our children after we are gone. What will their quality of life be like?
I am a woman of a certain age with two grown sons who both have autism. I am starting to think hard about their future. Really hard.
My first wake-up call came when my parents purchased US Savings Bonds for each of them in amounts that were way over the countable income limit for SSI. It was wonderful of them! It caused a lot of problems, though. Enough time has passed for us to work through the problems, but that started me thinking about how my sons were going to get along as adults who each have incomes well below the poverty line. What would their quality of life be like when they could have no more than $2,000 in the bank at any time (and most of the time they have practically nothing there)—or risk losing the government benefits they depend on?
I am grateful for SSI and Medicaid. I know my children will have the basics of what they need to survive. But I want to have some assurance they will have what they need, as well as what will enhance their quality of life and make them more fulfilled and independent. There are things I can do to make that happen.
Up until about five years ago, a special needs trust was the only option for providing for their future. Special needs trusts can be beneficial, but require the services of an attorney who specializes in disability law. They can be very expensive to set up and maintain. I outlined the basics of what I learned about special needs trusts below, just so you can get an idea about what they are like.
There are three kinds of special needs trusts:
- 1st Party
- 3rd Party
1ST PARTY TRUSTS
This kind of trusts contains money that is generated by the disabled individual. It’s his own money that gets put in the trust. This could be inherited money or money awarded in a court settlement. It can be used to pay ONLY for stuff that is not covered by government payments, like SSI, and the rules are very strict. When the disabled individual dies, any money left in the trust has to be paid to the state to reimburse them for Medicaid healthcare charges that the individual had over his lifetime. You can learn more about 1st Party Special Needs Trusts here.
3rd PARTY TRUSTS
You have probably guessed that this trust is made up of money that is contributed by family members. They can be contributed to by family members at any time. The same rules apply as to how the funds can be used – something other than the usual expenses that are typically covered by SSI, and there are strict guidelines for qualified expenses. But the big difference comes in what happens after the disabled individual dies. The money does not go to the state. Because the funds were contributed by family members (who were the owner of the funds at the time), the family retains control of the account and the dispersal of the funds. You can learn more about 3rd Party Special Needs Trusts here.
These are administered by a non-profit organization on behalf of a group of disabled individuals. Since a trustee administers all of the funds in the pool, these trusts are less expensive to maintain. A separate account is maintained for each person (and they can be either 1st Party or 3rd Party accounts), but all the money goes into a pool for the purposes of investment and management. Medicaid payback applies to any 1st Party Trusts in the pool. You can learn more about Pooled Special Needs Trusts here.
Now that you know a little about trusts, I will outline what I think might be a great alternative for your family to gift money to your son or daughter. In 2014, the ABLE (Achieving a Better Life Experience) Act became law, giving everybody the opportunity to easily provide for the future of their children. No attorney required.
An ABLE account is a tax-sheltered savings account for a person with a disability. Deposits to the account belong to the disabled individual, who is considered to be the account holder. As long as they have a trustworthy guardian (you or whoever comes after you), they are good to go. If they can make some of their own monetary decisions, an ABLE account makes even more sense.
Anyone can contribute to the account. An account can be opened for anybody as long as the developmental disability was diagnosed before the age of 26. Only one account can be opened per individual.
Like trusts, these accounts have some restrictions, too, on how the money can be spent, but they are much more flexible. ABLE accounts are intended to provide funds for expenses that are necessary, but that aren’t covered by government benefits. Funds can be used for anything that relates to the disability, including anything that assists the person, makes them more independent, or makes their quality of life better. Just keep track of your receipts and record how each expense meets the definition of a “Qualified Disability Expense”. (That will protect you on the off chance you are audited by the IRS.) You can find out more qualified expenses here.
ABLE accounts have contribution caps: up to $15K per year and up to $100K total without endangering the individual’s SSI benefits. It’s subject, though, to Medicaid payback, just like 1st Party trusts.
One of the advantages of an ABLE account is that it is not expensive to set up. Any trust really must be set up by an attorney with expertise in the area of special needs. An attorney who is a specialist can be very expensive, to say the least. An ABLE account can be set up by a mom or dad or grandparent. There are fees, but they are not ridiculous—and you have the freedom to enroll in any state’s program as long as that program accepts out-of-state residents. You can view the states that offer ABLE programs here, and here’s a tool for comparing the state programs. Learn more about ABLE accounts here, and I wish you well with your planning!
Joan is the mother of two sons with autism and is VP of Marketing at PMF.