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Financial Planning for a Family Member with Special Needs

Written By Editor on 3/17/23 | 3/17/23

Having a child with special needs presents unique challenges. You may worry about his or her physical and mental wellbeing. You may also worry about their financial future if their condition limits their ability to earn a living and pay for living expenses upon reaching adulthood. Fortunately, there are steps you can take to help ensure your child has sufficient financial resources along with a dedicated support system. Here are six strategies to help protect your child’s future.

Fund an ABLE account. Thanks to The Achieving a Better Life Experience (ABLE) Act of 2014, families can participate in a tax-advantaged savings program for a family member with a qualifying disability that occurred before age 26. As the owner and designated beneficiary of the account, your child can withdraw funds tax-free to pay for eligible disability-related expenses. They also may be eligible for a tax credit for contributions you make to the plan.

An ABLE account is very similar to a 529 college savings plan. Anyone can contribute to the ABLE account, including grandparents and non-relatives, up to the annual gift tax exclusion (unless limited by your state). Contributions are made with after-tax dollars and are not tax deductible at the federal level. Some states do allow contributors to take state income tax deductions. Not all ABLE plans are equal; shop around to find the most advantageous plan for your child’s needs. 

Establish a special needs trust. A special needs trust (SNT) can provide financial security by creating an income stream to a loved one with special needs. Having funds in this type of trust would not disqualify your child, as beneficiary, from receiving government assistance. Note that he or she would not have direct control over funds in an SNT, which may not be ideal if he or she is capable of managing their own finances.

There are several different types of SNTs (first-party, second-party and pooled); each of which is governed by various requirements. Because of their complexity, SNTs are usually prepared by a licensed attorney and may cost several thousand dollars to set up.

Buy a life insurance policy. Consider purchasing a whole or term life insurance policy that names your loved one as the beneficiary when you die. To ensure the payout does not disqualify the recipient for federal and state resources, set up the policy to pay proceeds into a special needs trust. 

Ask the courts to appoint a guardian. When an adult family member with special needs has significant assets or property and is unable to manage their own financial affairs, a guardianship may be appropriate. When a guardian of the estate is appointed, all financial matters are managed for the person with disabilities. This person will pay bills and is required by law to maintain detailed records to account for all spending. A family member is often appointed to this role; however, in some cases the court will appoint an unrelated individual.

Watch out for scammers. Individuals with disabilities may be more vulnerable to identify theft and other scams. Monitor credit reports to keep an eye out for unauthorized accounts. Consider enrolling your child in an identity theft protection program. Be aware that phone and internet scammers routinely target recipients of government checks by impersonating government agents. 

Consult the experts. Talk to your financial advisor for ideas and guidance on ways to safeguard the financial well-being of your special needs child. Your advisor will be able to recommend a qualified attorney if you decide to open a special needs trust. A tax specialist can also be a valuable resource to help with tax planning for you and your child.

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