Clients who have special needs children require distinctive planning help in order to save enough resources for a lifetime of care in ways that don't jeopardize collection of federal benefits.
Two developments during the last 16 months have given financial planners and lawyers better tools to deploy for the care of disabled children. One is the creation of tax-advantaged Achieving a Better Life Experience savings accounts, and the other is new rules around self-funded trusts that a special needs child can create for themselves.
"It's important to develop a plan for a child who has a disability because mom and dad aren't going to be there forever to support that child," said Nancy Nauheimer, a wealth advisor at Northern Trust Wealth Management.
Parents of the approximately 56.7 million individuals in the U.S. who have special needs typically depend on a combination of government benefits and their own funds to cover their care and support. The tricky part when saving for their care is that there is a $2,000 total asset limit for the disabled individual in order to be eligible for means-tested government benefits.
Once someone is deemed ineligible for this government support, he or she can be reinstated, "but it's an arduous process," Ms. Nauheimer said.
The newly available ABLE accounts, set up under similar tax rules as 529 college savings plans, are an important savings vehicle for parents to provide day-to-day and long-term care of a disabled child. The accounts, which must be funded with cash and have annual limits of $14,000, create a pool of resources that can be used for qualified expenses of the disabled person, which includes everything from healthcare and housing, to large purchases like travel or costly medical equipment.
"These really give the disabled individual the ability to save for themselves for the first time," Ms. Nauheimer said.
Money in these investment accounts, which can be opened for anyone who has been diagnosed as disabled by age 26, grows tax free. But there are two important details to these accounts long-term.
First, there is a $100,000 threshold that needs to be watched because if the account tops that, the eligibility of the child to receive supplemental security income can be suspended. Advisers recommend looking for an account that comes with an automatic alert if the account is nearing $100,000.
Also, after the death of the individual, the state can take all or some of the remaining funds in the accounts to make up for what they have spent on the individual's behalf, Ms. Nauheimer said.
The ABLE National Resource Center has a tool that can help families compare the features of different states' accounts. More than a dozen states have started these plans since they first began being offered in June 2016, with Alabama most recently introducing its program on March 1.
"ABLE accounts are valuable, but the dollar limitations are pretty low," said Steven Friedman, a law partner with Stark & Stark.
Special needs trusts are another common planning tool that can be used by families with special needs children.
A third-party special needs trust, also called a supplemental needs trust, can be established with funds that belong to someone other than a child, but the funds in the trust must be used to supplement government benefits that an individual with the disability receives.
The major advantages of these are that there's no limitation in how much can be accumulated in the trusts, and they can be funded with assets other than cash, such as real estate, investments, even life insurance proceeds.
Another trust is a self-settled special needs trust, where the funds that create the trust are owned by the child, often either through an outright inheritance or through a personal injury award. By having the funds go right into such a trust, the child avoids actually owning them and retains benefit eligibility.
Before President Obama signed the Special Needs Trust Fairness Act in December 2016, individuals with disabilities could not set these up for themselves and had to have a legal guardian do it for them, Mr. Friedman said. Today they can do it themselves.
"A person with special needs can have an ABLE account, a (self-funded) special needs trust and a supplemental needs trust and still qualify for public benefits, at least right now," he said.
Rules around these vehicles can always change, and government benefits afforded to disabled people can too, Mr. Friedman said. Families with special needs have seen that over the years the availability of benefits "is certainly not increasing over time, as medical care in general strains state budgets," he said.
Advisers who handle the investments within trusts need to pay close attention to the income distributions the individuals with special needs requires. None of the distributions can actually be paid to the individual, they must be paid directly for expenses that aren't covered by any government program,
Dental work, hearing aids, entertainment, health clubs, college tuition, private counseling and vacations are among the common uses Ms. Nauheimer has seen funds in the trusts cover.
Advisers and attorneys agree that planning for disabled children isn't a "set-it and forget-it" activity.
"Plans should be revisited periodically as the parent situation changes or maybe the child's needs change, too," Ms. Nauheimer said.