If you have a minor child or dependent loved one with special needs, chronic illness, or any disability, special needs financial planning concerns are likely top of mind.
Often, family members or close friends want to help you by gifting to your child/loved one or leaving an inheritance to them. Though this generosity may be appreciated, there can be unintended side effects of gifting outright to someone who has special needs.
If your child/loved one with special needs is 18 or older, outright gifts can affect their eligibility for some government benefits and community-based programs. This is important to keep in mind because frequently a working adult with special needs cannot earn enough income to meet their own basic living expenses. Medicaid and Supplemental Security Income (SSI) are needs-based government programs designed to cover costs related to food, shelter, and medical care. These benefits can be valuable to help alleviate some of the financial burden that falls on you as the “parent”. They also allow you to focus your own financial planning around supporting your child/loved one with supplemental expenses not covered by these benefits, saving for your own retirement or your future long-term care costs, and/or providing for your other children.
Outright gifting also raises concerns about who will manage the assets that are given to the individual and how they will be protected from fraud attempts or creditor situations. There are planning strategies that can help with these areas. These strategies cover two categories: those gifts or inheritances that have already been completed and future gifts and inheritances.
When it comes to completed gifts and inheritances, different considerations apply depending on whether your child/dependent is a minor or an adult. If your loved one is a minor and has received gifts or inheritances in their name, the money might be held in a Uniform Gift to Minors Act (UGMA) account or Uniform Transfer to Minors Act (UTMA) account. Money deposited into a UTMA is considered an irrevocable gift to the minor, meaning that, despite being the parent, you cannot transfer these funds into your own account. Instead, the recommended strategy is to utilize these accounts to cover necessary expenses before the minor reaches the age of majority. This allows the minor to benefit from this money now, while it is shielded from future Medicaid and SSI asset tests. In order to qualify or to continue to qualify for these government benefits when your loved one reaches age 18, they typically cannot own more than $2,000 in assets.
If your child/dependent received a larger windfall that will not be spent down before they reach adulthood, or if they are already close to adulthood, it may be prudent to consider a “self-settled” (or first party) special needs trust. This type of trust is set up by a parent or grandparent and allows the dependent to be the beneficiary of the trust that is funded using the dependent’s own assets. This type of trust can also be useful for adults who receive an unexpected windfall or a settlement from an accident that may have caused the disability.
An attorney can help you decide which type of self-settled special needs trust is best. There will be specific language written into the trust document that limits the use of the trust to those expenses not covered by government benefits. If there are any remaining assets in the trust after the life of the beneficiary, these assets will first be used to reimburse Medicaid for covered expenses, with any leftover funds then distributed to the remainder beneficiaries.
For those gifts or inheritances that have not yet been completed, you can plan in advance by establishing a “third party” special needs trust, where your loved one with the disability is the beneficiary. This type of trust is funded using assets that are not owned by the person who is disabled. Like the self-settled trust described above, the attorney who is helping establish the third-party trust should include specific language limiting the use of the money to supplement, rather than replace, income provided by SSI or Medicaid. Unlike the self-settled trust, any remaining funds in the third-party trust will not be used to repay Medicaid. Instead, other designated remainder beneficiaries will receive the leftover assets.
The assets in both types of trusts are protected against creditors should an issue arise with your loved one in the future, as they will be the beneficiary of the trust. Additionally, a trustee will be named who will oversee the money, which protects the beneficiary if they are unable to manage their own finances or if they are susceptible to fraudulent schemes such as scam phone calls or emails.
You will likely serve as the trustee so that you can manage the investments and make withdrawals to cover your loved one’s supplemental expenses. Keep in mind that any payments from the trust should be made for the benefit of your loved one only and should be paid directly to the service provider.
In addition, you will name a successor trustee to step in the event something were to happen to you. This person should be familiar with your loved one, have no conflicts of interest with the money, financially competent and willing to take on the role if necessary. You may want to consider appointing a professional or corporate trustee as a successor co-trustee. This trustee can manage the assets or take over the administrative duties related to the trust including the coordination of SSI and Medicaid benefits and tax filing. An alternative option is to name a “trust protector” who can advise the trustee on issues around investments and government benefits. The trust protector will not have any legal authority over the trust but can provide support when needed, including potentially making changes to the trust and trustee who is appointed.
Finally, it is beneficial to accompany the trust with a Letter of Intent, written by you. This is not a legal document, but it outlines, in specific detail, your wishes for your child/dependent loved one when you pass away. The details included in this are medications, daily schedule, your loved one’s likes and dislikes, hobbies, and more. This document will be helpful for your successor trustee and other family members who will be supporting your loved one ongoing.
There are many complexities surrounding special needs trusts and financial planning for those with special needs in general. Be sure to seek guidance from fiduciary financial professionals who have experience in this area, such as chartered special needs consultants or special needs tax strategy specialists.
We have advisors, including a Chartered Special Needs Consultant (ChSNC®), who are skilled in the area of special needs planning. To learn more about how Modera Wealth Management can help, please reach out to us today.
Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
"*" indicates required fields
If you are not a current client but would like to receive pertinent information about how we help people like you, please sign up now. We will send you helpful content and webinar invitations. Thanks for your interest!
