Q. I recently read an article in CNBC that’s states that, “It can take millions to care for your special needs child.” The article describes how one family needed $3 million to cover the cost of lifetime care for their 23-year-old son who has autism. We have a son with autism who is currently 7. We already take him to three different therapies, none of which are covered by insurance, to insure he has the best assistance available in the areas of speech, motor skills, and social skills, and we are considering private school for him at $30,000 a year. He will likely need continued assistance after he is done with high school. What are some ways that we can plan for him to help cover the lifetime cost of his care, and to ensure that he will be cared for should something happen to us? Also, I heard about the ABLE Act and that there have been some changes enacted this year. Could you explain more about that and what strategies are best for someone in our situation? Thanks for your help!
A. There is no doubt that early intervention is your child’s best hope for the future, so although I’m not a medical expert, I commend you for taking these actions to help your son. Unfortunately, similar to Alzheimer’s and other neurological disorders that face adults, there is no cure for autism, and therapies and special schools and group homes in the future are expensive. As you mentioned, what happens when your child becomes an adult and you need to care for him with a lifelong cost close to 3 million dollars? Luckily, there are special needs planning strategies to help you continue to afford these lifelong costs.
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. Plus, until your child reaches the age of 18, your income and assets are deemed to your child, which means your child, like most, probably will not qualify for SSI benefits until age 18. However, most children with severe disabilities will qualify for in-home Medicaid benefits despite the deeming rules, but some Medicaid programs have a waiting list, so it is crucial that you apply for Medicaid for your child as soon as possible to help cover the cost of medical expenses and custodial care expenses during your child’s lifetime.
To protect your child with special needs after your death, a special needs trust is essential. A third-party special needs trust (also called 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 member after his or her death, instead of going toward Medicaid reimbursement. An experienced Special Needs Planning attorney, such as myself, 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. See https://www.farrlawfirm.com/disability-and-special-needs-planning/
for more information about special needs trusts, including how they work and how you can best find them.
ABLE accounts allow families to sock money away for a beneficiary and have it grow on a tax-deferred basis. Distributions are tax-free if used for qualified disability expenses. A good plan can include both a special needs trust and an ABLE account.
What are ABLE Accounts and How do they Work?
An ABLE account is a tax-advantaged savings account for disabled individuals, created by law in 2014 as part of the Achieving a Better Life Experience (ABLE) Act. 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 $15,000 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.
Accounts through ABLEnow (a savings plan offered in Virginia) don’t have an enrollment fee and aren’t subject to minimum contribution requirements. Savers with less than $10,000 in the account will have a monthly service fee of $3.25 through ABLEnow. There are asset-based fees from 0.37 to 0.40% that apply, if you choose investments.
Changes to ABLE Act are Taking Place
You asked about changes to ABLE Accounts that are going into affect this year. You are right — there are significant changes/enhancements to the ABLE account, as follows:
1. ABLE to Work- The ABLE to Work provision was passed by Congress as part of the Tax Cuts and Jobs Act of 2017. It is currently set to expire on January 1, 2026.
This provision allows an ABLE account beneficiary who works and earns income to contribute funds above the $15,000 annual limit.
The additional contribution may be up to the lesser of: the account beneficiary’s earned income or the federal poverty line, which for 2018 is $12,060. This means it is possible to contribute up to $27,060 to an ABLE account in one year.
Two additional elements of the law to be aware of when considering eligibility for the additional contribution:
(1) the ABLE beneficiary may not be a participant in his or her employer-based retirement fund, including if an employer makes contributions to the fund on the employee’s behalf.
(2) the Beneficiary’s employment earnings deposited in an ABLE account are still counted in terms of Substantial Gainful Activity (SGA) or earned income, and will be taken into consideration when determining eligibility for certain public benefits.
Example: An ABLE owner has a job and makes $13,000. He or she does not participate in his or her employer’s retirement plan. Although his or her parents have put $15,000 into his or her ABLE account in 2018, he or she can contribute an additional $12,060 of HIS or HER OWN MONEY into his or her ABLE account.
2. 529 Fund Rollovers: This provision allows funds in a 529 College Savings account to be rolled over into a 529A(ABLE) account. It is currently set to expire on January 1, 2026.
The ABLE account beneficiary to receive the rollover funds must be either: the beneficiary of the 529 College Savings Account or
A “family member” of the beneficiary of the 529 College Savings account. The rollover funds are subject to the annual contribution limit currently set at $15,000 per year, given that no other contributions have been made into the account that year.
Example: A 10-year old boy just received a diagnosis of autism. When he was much younger, his parents started a college savings fund (529) for him, but now it is not known whether he will go to college or not. An ABLE account may be opened for him assuming he meets the criteria, and his or her parents may now roll over the 529 to an ABLE account without any penalties or taxes due on earnings.
3. Saver’s Credit: Also known as the Retirement Savings Contributions Credit, was designed to provide an incentive for low and middle income individuals to save. It is currently set to expire on January 1, 2026. An ABLE owner contributing to her own account, and meeting the following eligibility requirements, may claim this credit toward taxes owed with the maximum value reducing the taxes owed to zero. The ABLE owner must be:
• Age 18 or older
• Not a full time student
• Not claimed as a dependent on another person’s return
Details about the Saver’s Credit:
• Maximum credit is $2000 for an individual and $4000 for a couple
• Percent of your contribution allowed to take is reduced as your AGI (Adjusted Gross Income) increases
Example: You are an ABLE owner working and making $20,000. You have put $2000 into your ABLE account this year. You can take a credit of 50% of your contribution, equal to $1000 in this case, to reduce your tax liability. If possible, you can use this $1000 to contribute further to your savings.
For further information about the ABLE Act and changes being made to it, please visit the ABLE National Resource Center website.
Have an ABLE account? Why a Third-Party Special Needs Trust is Still Recommended
As mentioned earlier, a Third-Party Special Needs Trust is recommended to protect a disabled individual’s financial future, in addition to an ABLE Account. The reason is that this type of trust preserves legal eligibility for federal and state benefits by keeping assets out of the disabled person’s name while still allowing those assets to be used to benefit the person with special needs. Read more about this and other options here.
Special Needs Planning
When it comes to special needs planning and financial planning for yourself or a loved one, The Farr Law Firm can guide you through this process. If you have a loved one with special needs, call us to make an appointment for an initial consultation:
Fairfax Special Needs Attorney: 703-691-1888
Fredericksburg Special Needs Attorney: 540-479-1435
Rockville Special Needs Attorney: 301-519-8041
DC Special Needs Attorney: 202-587-2797
About Evan H Farr, CELA, CAP
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