For those who have family members with special needs, the planning considerations can be cumbersome. Not only are there tax, estate, and financial considerations, but also there are emotional considerations when figuring out who can care for a child with special needs when you are gone. Below we have shared some important items to keep in mind.
Also known as 529A accounts, ABLE accounts provide tax-advantaged means of investing money for future living expenses without impacting eligibility for means-tested government benefits, such as Supplemental Security Income (SSI) or Medicaid. Accounts may be opened if the beneficiary’s disability began before age 26. Annual contributions from non-beneficiaries are capped at $15,000 (the annual gift tax exclusion amount). For any beneficiary who works but does not participate in an employer sponsored retirement plan, they can also contribute their own compensation up to the federal poverty level, which was $12,880 for individuals in 2021. Total contribution limits vary by state, ranging from $235,000 to $529,000 for 2021. Once the balance hits $100,000, the beneficiary will no longer be eligible for SSI, but can receive Medicaid. The money inside the account is invested to grow tax-free and can be withdrawn tax-free for “qualified disability expenses” at any time.
Special Needs Trusts
A Special Needs Trust can also provide for the living expenses of a child and protect eligibility for government benefits. Trusts allow for unlimited contributions and growth, and a beneficiary can have more than one trust unlike an ABLE account. However, trusts are more expensive to set up and administrator, have higher trust tax rates than individuals, and will require a trustee to administer the trust. Special Needs Trusts are popular options for holding real estate or the family home in order to safeguard a home for the disabled; however, you should make sure the trust has sufficient funds for expenses and upkeep.
The trustee should be chosen with absolute care as they will be given “sole and absolute” discretion, which is a standard required for determining eligibility for SSI or Medicaid. While adult siblings could be trustees, there could be an inherent conflict of interest if they or their children are future trust beneficiaries. You might consider appointing a corporate or professional trustee and appoint a family member as trust protector who may remove the trustee, if necessary.
Financial Power of AttorneyIn the event you, as a caregiver, become incapacitated during your life, you need to have documents in place to allow for the continued care of your special needs child. Make sure your financial power of attorney specifically outlines that your agent can make discretionary distributions for the benefit of your special needs child and also allow them to establish and fund a trust for such child.
Letter of Intent and Care
A letter of intent and care is not a legal document but is a vehicle to leave future caregivers to outline instructions, such as daily living activities, unique likes or dislikes, special needs of care or preferences, and other critical information that someone who takes over the role as caregiver would need to know. Make sure this is kept in an easy to access location.
Retirement Plan and Insurance Beneficiaries
Review your retirement plan beneficiaries closely as naming a special needs child directly rather than through a special needs trust could jeopardize their means-tested benefits. However, one positive change from 2020 is that a person with disabilities is exempt from the new “10-year payout rule” applying to inherited retirement accounts. By having the special needs trust inherit the retirement accounts, the trustee can still use the “stretch” distributions rules based on the life expectancy of the disabled beneficiary. However, this process can easily cause errors as it’s important that the special needs trust is an “accumulation trust” and remainder beneficiaries who are younger than the beneficiary are selected. Depending on your circumstances, it may make more sense to draw down retirement plan assets in order to purchase life insurance that funds the special needs trust upon your death, or leave the funds to other heirs.
Coordinate Estate Plans with Relatives
Any family members who wish to name your child as a beneficiary should be made aware that any potential inheritance should be directed to a special needs trust in the beneficiary’s name rather than outright in the name of your child.
Estate Plan for Special Needs Child
Do not forget that a special needs child may need their own estate plan. Be sure to help them set up basic documents, such as a general power of attorney, a health care directive, and a HIPPA release. Depending on your child’s capacity, they should set up a simple will outlining where assets should be distributed in the event of their death.
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Disclaimer: Information provided is for educational purposes only. Your advisor does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, your advisor makes no warranties with regard to such information or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.