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Financial Planning Strategies for Families Raising Children With Special Needs

How to plan, save and protect assets for what matters most

Published on: September 28, 2022

Mom and son with special needs sitting at a table smiling together

Editor's note: Susan Zurek and Monica Padineant contributed to this article. 

Raising a child can be one of life’s most rewarding and exhilarating experiences. The support, care and love you provide will have a profound influence on your child’s life. Watching them develop their individual personalities and independence gives you hopes and dreams for their futures. One day, they’ll launch into adulthood, become productive members of society and maybe even start families of their own.

There’s a lot of work involved, and not everything will go according to plan. For families that have children with special needs, however, there are different complexities. And the number of children living with disabilities appears to be on the rise.

The Centers for Disease Control and Prevention reported in 2018 that about 1 in 44 children has been identified with autism spectrum disorder— an increase from 1 in 150 in 2000 — and that 17 percent of children ages 3–17 were diagnosed with a developmental disability, as reported by parents, during a study period of 2009–2017. These disabilities included autism, attention-deficit/hyperactivity disorder, blindness, cerebral palsy, among others.

Families raising children with disabilities not only need to provide for their children’s needs — medical, developmental and educational among them— they also need to plan for how these needs will be paid for, now and in the future.

The costs of caring for a child with special needs can be high, but many costs can be mitigated when the child is young. Health insurance may cover many expenses directly associated with their medical care, including a range of therapies. Government assistance, through Medicaid or, in Washington state, the Developmental Disability Administration, can provide additional resources and assistance.

A child’s individualized education plan may provide a path to financial assistance for educational support programs that can’t be provided in a school setting or by existing school resources. As a child ages toward adulthood, however, things begin to change. Depending on the degree of a disability, that child may seek more independence in their living situations, want to get a job and earn their own income, or need a legally appointed guardian, for example. And, while many parents don’t want to think about this, it needs to be said: The parent or caregiver may not be able to provide for the child the way they were able to when they were younger.

While there are many things to consider, from the standpoint of financial planning, there are two strategies that need to be part of the planning.

529 ABLE plans

Many parents are familiar with 529 college savings plans, but in our experience, not as many know about 529 ABLE accounts, which are tax‐advantaged savings accounts for individuals with disabilities. These accounts provide funding for disability-related expenses by supplementing private insurance, Medicaid, Supplemental Security Income (SSI) or other financial resources. Funds from a 529 ABLE account can be used to pay for qualified disability expenses, including but not limited to: education costs, housing, transportation, employment training, assistive technology, personal support services, health-care expenses, financial management and other expenses that help improve health, independence or quality of life.

Many families open 529 college savings plans before a disability becomes apparent or it changes the child’s future educational outcomes. For those in this situation, funds from a 529 plan account can be rolled over to a Washington State ABLE Savings Plan account as long as the beneficiary remains the same or the ABLE account is established for a member of the same family as the 529 plan account holder.

As with the 529 plan, anyone can contribute to the account, but there are contribution limits. Typically, this is $16,000 annually unless the beneficiary works and their employer does not offer a sponsored retirement plan, in which case the limit may increase. The other good news is that assets in a 529 ABLE plan are not counted for eligibility purposes for federal means-tested programs.

That said, there are details to pay attention to. Rollover funds from a 529 plan count toward annual contribution limits; some states have lifetime contribution limits; the amount of assets in the plan may stop SSI payments (but not Medicaid) depending on which state is providing benefits; and some states may file a claim on all or a portion of the assets remaining in the account after a beneficiary dies. A person can also be the beneficiary of multiple 529 plans, including ABLE accounts, but how these plans are used may change their eligibility to receive government benefits. It’s important to talk to a qualified financial planner to help you work through the details.

Father playing with a child who is smiling and laughing

Special needs trusts

Special needs trusts are another option that can alleviate some of the uncertainty by providing ongoing financial support for a loved one, as needed over time.

A special needs trust is typically created for a family member with a disability who may now or in the future qualify for government assistance, such as SSI or Medicaid. These trusts are important because the rules for qualifying for government programs are very specific. Beneficiaries can own a house and furnishings, a car and ordinary personal items. But if they have cash or other assets in their name valued at more than $2,000 in any one month, they may be disqualified for assistance, or their benefits could be reduced. Assets placed in a special needs trust, however, are not counted in means-based testing, and therefore are not included in the $2,000 monthly limit.

There are three basic types of special needs trusts that can be created, depending on the beneficiary’s current financial situation.

If the beneficiary previously owned the assets going into the trust (by way of inheritance, lawsuit proceeds or beneficiary designation), those funds must go into what’s known as a first-party special needs trust. If the beneficiary then uses government benefits such as Medicaid, payback rules apply, and a lien could be placed on the trust at the beneficiary’s death equal to the total amount of government assistance provided. This applies to government assistance received over the beneficiary’s lifetime, not just the lifetime of the trust. First-party special needs trusts are a common type of trust used when a disability occurs or emerges later in life and after assets have been acquired.

The most common type of special needs trust is known as a third-party special needs trust. These trusts are usually set up by parents or grandparents for a family member with special needs who may be eligible for public benefits now or later in their lifetime. These funds are managed and distributed by a trustee, can never be placed outright into the hands of a beneficiary and, in contrast to a first-party special needs trust, are not subject to the Medicaid payback requirement.

Finally, pooled special needs trusts are offered and managed by a variety of nonprofit organizations to benefit many different beneficiaries with disabilities. Like a mutual fund, incoming assets are commingled, invested and then distributed in proportion to each beneficiary’s share of the total amount. For those with trust assets of $100,000 or less, it’s worth looking into pooled trusts.

A good thing to know is that special needs trusts can be set up as a precaution. For example, if there is a potential inheritance in the future, a parent or grandparent may include a provision in their estate planning documents to shift those funds into a third-party special needs trust, should the need arise. This becomes very important if a beneficiary is currently receiving government benefits or may need them in the future. An outright distribution from a regular trust or estate could result in a reduction of government benefits or elimination altogether.

Choosing a trustee for a special needs trust is critically important. That trustee must be highly knowledgeable about trust laws and regulations, as how the trust is set up and the assets are distributed can have significant tax and other financial implications.

Having a child or grandchild with a disability or who faces physical or intellectual challenges can make life complex, and the financial decisions and realities can be overwhelming. With the proper planning, however, you can help create structures that will support a child’s financial needs well into adulthood so that they — and you — can focus on living the most productive life possible.

Susan Zurek and Monica Padineant are certified financial planners and directors at Laird Norton Wealth Management.

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