The cost of care during the parent’s lives and care after the parents have passed is a major concern, but there are solutions, including ABLE accounts.
With the right guidance, it is possible for parents of special needs children to plan for the cost of a lifetime of care. That includes the support provided by government programs and the use of ABLE Accounts, which permit contributions of up to $14,000 a year.
CNBC’s recent article, “It can take millions to care for your special needs child. Here's how to do it,” explains how one family needed $3 million to cover the cost of lifetime care for their 23-year-old son who has autism. The family drafted a special needs trust and funded it with life insurance to ensure that they’d provide for him after they’re gone. That's one strategy for families to help cover the cost of supporting their kids, while preserving benefits from Supplemental Security Income (SSI) and Medicaid.
Another option is an ABLE account. It’s a tax-advantaged savings account for disabled individuals created in 2014 as part of the Achieving a Better Life Experience (ABLE) Act. A plan can include both a special needs trust and an ABLE account.
SSI and Medicaid are critical in special needs planning. However, disabled individuals are subject to "means testing" to receive those benefits. Individuals with more than $2,000 in assets and couples with more than $3,000 don't qualify for the SSI program. However, a special needs trust can help them work with this requirement. A third-party special needs trust or a “supplemental needs trust” is created by family members and funded with assets that aren't owned by the disabled person. This can be life insurance and other property. These assets don't belong to the beneficiary, so they can go to other family members or to charity after his or her death, instead of going toward Medicaid reimbursement.
An experienced lawyer who is knowledgeable about Special Needs planning should draft this and other related documents. You’ll also need a trustee to administer the funds and an accountant or tax attorney to file the trust's income tax return.
ABLE accounts let families save money for a beneficiary and have it grow on a tax-deferred basis. Distributions are tax-free, if they’re used for qualified disability expenses. Beneficiaries must have been diagnosed with a qualifying disability by age 26.
ABLE accounts can receive up to $14,000 a year in total annual contributions, but for the beneficiary to remain qualified for government benefits, the ABLE account's balance can’t exceed $100,000.
When the beneficiary dies, Medicaid can file a claim for repayment of benefits. However, before that, the remaining balance of the account can be used by the estate to pay for any outstanding qualified expenses, like funeral and burial costs.
Planning for the care of a special needs child requires a team that includes an experienced Special Needs attorney, a CPA and usually a life insurance professional. You should create a life plan that provides specifics about dietary preferences, social activities, medical needs and any other details that would help a caregiver, when parents are no longer able to provide day-to-day care. Finally, be careful about beneficiary designations. If a special needs individual is the beneficiary of a policy or account, they could lose any government benefits.
Reference: CNBC (June 2, 2017) “It can take millions to care for your special needs child. Here's how to do it”