It is easy to think that something called a “special needs trust” is only used infrequently – after all, the very name implies the need for such a trust is rare. That could not be further from reality. Perhaps a more appropriate name would be “frequently needed trust.” Historically, special needs planning referred to financial planning concerns for individuals who are living with physical or intellectual disabilities diagnosed from birth, and that special needs planning was used by a niche group of individuals and families.
How big an issue is disability in our society? The number is surprising, as is the variety of individual situations for which special needs planning is needed. The Centers for Disease Control and Prevention estimates that 61 million adults in the United States live with a significant disability – that’s just over 1 in 4 adults who have some type of disability, whether a mobility impairment, intellectual and developmental disabilities, brain injuries, mental illness or chronic conditions. And those 1 in 4 adults do not include an untold number of Americans who may be dealing with the yet-unknown effects of “long COVID,” which could result in disability in the future. Given the high number of individuals who are currently living with or may develop a disability in the future, special needs planning is very important to consider when creating your financial plan.
The population of people with a disability is growing rapidly, mainly because of increasing longevity. Fewer than 7% of Americans under the age of 18 have a disability, but for those 65 and older, the incidence of disability leaps to 40% according to CDC research. The goal of effective special needs planning is to not only secure the financial future of the person living with a disability but to also create a meaningful, fulfilling life for that person.
So, what are the steps to create a special needs financial plan?
Preventing the Worst-Case Scenario
The first step is to understand the various governmental support options, how to qualify and maintain eligibility of these programs, and which programs are means-tested. Social Security and Medicare are insurance programs that most people are familiar with as retirement programs and are paid for with premiums withheld from wages. Medicaid provides health coverage for low-income adults, children and people with disabilities and is administered by individual states, according to federal requirements. There is also a Social Security Disability Insurance (SSDI) program for workers who are disabled before retirement age. There are some significant benefits those on SSDI can qualify for that are less frequently known:
- Receiving SSDI benefits for 24 months qualifies a recipient for Medicare, regardless of age.
- And a person who has a diagnosed disability before age 22 can become eligible for SSDI and Medicare based on their parents’ work history.
In their lifetime, a person with a disability may need all four of these programs to cover their basic needs. It is very important to work with your financial adviser, and in particular an adviser with expertise in special needs planning, to understand which programs are options and how to manage the person with the disability’s financial affairs to abide by the limits of assets that the individual may control before being disqualified from benefits and the specific rules that apply depending on the state you live in. The asset limit is quite low – typically, a person with a disability may not directly own more than $2,000 in assets – and it is easy to accidentally be disqualified from benefits if you are not careful.
The public benefits are valuable but often insufficient. Most people with disabilities cannot afford to lose the benefits, but the benefits alone do not provide enough support for a comfortable life. So, what do you do to add in supplemental support? Frequently, I hear that the “simplest” solution would be to disinherit the person with the disability so they can keep the public benefits, but that solution leaves too much to chance to be viable. Sometimes, family members do not feel the same moral obligation to support the person with the disability, or the funds that were supposed to be set aside may be lost to divorce or lawsuits.
A better way to ensure the orderly transfer of assets for the ongoing support of a person with a disability is to use a discretionary trust, also known as a supplemental needs trust or special needs trust. A discretionary trust of this type has specific language that prohibits the trustee from paying for the basic food, shelter and medical benefits provided by governmental programs and ensures that the assets in such a trust are neither owned by nor controlled by the beneficiary, so the trust assets do not jeopardize the beneficiary’s means-tested governmental benefits.
There are three basic kinds of special needs trusts: third-party trusts, master pooled trusts, and first party Medicaid payback trusts. Depending on the financial and lifestyle needs of the beneficiary and their family, one of these trusts may be better suited than another. Confirm with your financial adviser and estate planning attorney to determine what is best for your personal situation.
Next, you need to ensure that the framework you have created has a thick layer of protection against major causes of financial turmoil for a special needs plan – medical expenses and premature death of the primary breadwinner in the family. In most cases, it is imperative that you understand the health insurance options available for the person with the disability, whether through government programs or via a private insurance policy. Additionally, life insurance is more important to families with disabled dependents than it is for the typical household. Providing for a family member with a disability is one of the best reasons to buy some form of permanent life insurance. Usually, second-to-die or survivorship type policies are the most appropriate product to fund a special needs trust.
The final step in a disaster prevention plan is to create an operation manual for the household, documenting all the information someone would need to step in and carry on as primary case manager and caretaker if needed. This is critically important for a surviving spouse as well as a successor caretaker when someone with a disability moves out on their own or loses the support of a previous helper. A good document filing system, medical records keeper, and a password logbook or password manager software is essential to maintain a reliable operation manual.
Enhancing the Financial Plan
People with disabilities need more than the basic financial plan – the same tools and techniques may be applied but likely need to be modified or adapted. First you need to consider the three phases of a financial life cycle – dependency (usually minor children/student years), accumulation (working /family earning years) and distribution (retirement years.) Someone with a disability may take a little longer to reach their accumulation years and may need to begin the distribution years earlier than the typical peer.
Couples with a loved one with special needs may need to increase their savings rate, considering a 10%-15% minimum savings rate or more to account for a three-person (and possibly two-house) retirement. It is important to make sure these increased savings use the most efficient vehicles for wealth accumulation, including consideration of different types of life insurance and increased amount of annual earnings coverage. Additionally, making sure that employer qualified plans and IRAs have correctly named beneficiaries and consideration of tax treatment upon distribution, noting that trusts reach the highest federal tax rate of 37% at just $13,451 of income in 2022, is important. Your financial adviser and tax professional are key to making sure these factors are optimized.
The ABLE Act of 2014 created a new savings vehicle for people with disabilities that is especially useful. The ABLE account is an inexpensive, flexible savings plan for a person with disability which can be funded with earnings from employment or contributions from family members or friends, subject to annual contribution limits. There are certain criteria to be eligible to open an ABLE account. An eligible individual must have developed their disability before the age of 26 and have been living with their disability for at least one year or expect their disability to last for at least one year. The ABLE account is similar to the structure of a 529 college savings plan where after-tax money is saved, tax-deferred growth happens while the funds are in the ABLE account and tax-free distributions for qualified expenses come out. The ABLE account is an asset that a person with a disability can own directly without disqualifying themselves from Medicaid. However, if an individual with a disability has more than $100,000 in an ABLE account, then SSI benefits may be suspended so it is a best practice to keep a careful eye on the balance of the account to avoid inadvertently disqualifying from public benefits. The asset limit means the ABLE account can’t take the place of a special needs trust, but it is a great substitute for an IRA or a 401(k) plan for people who are able to work, allowing them to accumulate funds for education, a vehicle or a major purchase.
The Goal of Special Needs Planning
The goal of special needs planning is the same as the goals we use for all our clients – the opportunity to enjoy a fulfilling life with the chance to be themselves and make a unique contribution to a community that supports and values them. Even if the requirements of governmental programs mean that a person with a disability may never have a direct net worth that exceeds $2,000, a sound and carefully considered financial plan can make those goals happen for every member of a family with the partnership of your financial adviser, estate planning attorney and tax professional.
Special thanks to Christopher Currin, CFP ®, Senior Wealth Advisor, for his invaluable research and expertise in creating this article.
The CDFA® mark is the property of The Institute for Divorce Financial Analysts, which reserve sole rights to its use, and is used by permission.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors is registered as an investment adviser with the SEC. Content is for educational and illustrative purposes only and does not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors.
Managing Director of Client Experience, Mercer Advisors
Kara Duckworth is the Managing Director of Client Experience at Mercer Advisors and also leads the company’s InvestHERs program, focused on providing financial planning to serve the specific needs of women. She is a CERTIFIED FINANCIAL PLANNER and Certified Divorce Financial Analyst®. She is a frequent public speaker on financial planning topics and has been quoted in numerous industry publications.
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