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New Law Helps Financial Planning for Special Needs Families

Rick Hodges, father of a special needs daughter, attended a financial planning seminar when his daughter was four. Mere minutes into the seminar, Hodges realized the seminar would be of little use for his particular situation. Most financial plans are predicated on the assumption that the children will grow up, go to college, become self-supporting, and then make their own financial plans for their own children. Hodges knew this would likely not be the path his daughter Audrey’s life would follow. Audrey has Downs Syndrome, and amid uncertainty regarding Audrey’s future, her father is certain she will require long-term financial support.

How the ABLE Act Came About

A group of Northern Virginia parents were instrumental in getting the Achieving a Better Life Experience (ABLE) Act through the House and Senate in December 2014. This bill reflects an increasing public awareness and acceptance of intellectual disabilities. The ABLE Act allows the person with mental disabilities to accrue a savings account with tax advantages worth up to $100,000, while keeping federal benefits. Individuals are allowed to keep Medicaid coverage no matter how large the account grows. Interest on the savings account is tax-free. Money in the savings account may come from family or friend contributions or from what the disabled person’s own earnings.

How the ABLE Account May be Spent

When used for such expenses as education, health care, housing, and other approved expenses that are not covered by Medicaid, withdrawals are non-taxable. The average life expectancy for a person with Downs Syndrome was 25 in 1983, and 60 today. Many of those with Downs Syndrome or other intellectual disabilities are able to work and want to work. Yet, according to Hodges, “you have to be poor, or pretend to be poor,” in order to receive disability benefits for the child while saving for the future. The ABLE Act uses a much simpler approach than a special needs trust, expanding on the savings plan many families use for college funds, known as the 529. This does not mean the ABLE Act does not have drawbacks that a special needs trust may not.

Eligibility for an ABLE Account

Eligibility for the ABLE plan requires the individual to have a mental disability, which occurred prior to the age of 26. Each person may open only one ABLE account. The ABLE account can be opened by the disabled individual or by others, with the qualifying individual named as account beneficiary. As much as $14,000 can be deposited into the ABLE account each year. If the beneficiary of the ABLE account is receiving monthly SSI benefits and the account surpasses $100,000, those benefits will be placed in suspension.

When the account falls below $100,000, the benefits will resume with no re-application required. When the qualifying person dies, remaining ABLE assets will be used to pay back any state Medicaid plan—based on amounts paid by Medicaid after the creation of the ABLE account. This is the major drawback to the Act, as most families don’t want to give up the right of other family members to benefit from the remaining assets.

Benefits of a Special Needs Trust

Families may want to speak to a Virginia estate planning attorney who is experienced in special needs trusts in order to avoid the Medicaid payback requirement of the ABLE Act. Unlike an ABLE account, any remaining assets in a Third Party Special Needs Trust are not recoverable by Medicaid. This allows the creator of the trust to provide for a secondary beneficiary. Like an ABLE account, a special needs trust protects the future of the disabled person. Such a trust preserves legal eligibility for federal and state benefits, while allowing the assets to be used to benefit the special needs person. In some cases, a special needs trust can be funded with term life insurance. Term life insurance may be the most cost-effective method of funding for many families, at least in the short-term; however, in the long run, whole life insurance could be preferable. There are many questions associated with setting up a special needs trust or an ABLE account. The best person to answer those questions is a knowledgeable Virginia estate planning attorney who understands what your special needs child will face in his or her future.