Planning With a Special Needs Child Must Span Two Generations

By Michael Roberts
Member of Ed Slott’s Elite IRA Advisor GroupSM

Even though it was 25 years ago, it seems like yesterday that my wife and I had our son evaluated by a pediatric specialist who told us our son would never live independently.  When our child was diagnosed with a special need, our initial focus was on learning about the disability (autism), finding therapists and researching educational rights. Preparing for our child’s financial future (and even your own) was not an initial priority. The reality is that when there is a disabled child, the family financial plan has to span two generations rather than one. The plan needs to take into account the potential for government benefits and, with any comprehensive plan, has to address how to minimize taxes.

Adult services and benefits for a disabled adult child usually require that the child qualify for Medicaid and apply for Supplemental Security Income (“SSI”) when they turn 18 (although a child may be eligible for Social Security Disability Income and Medicare based on either of the parent’s earnings record if a parent is currently receiving Social Security benefits). The maximum Federal SSI monthly benefit is $733. Even with other government benefits, SSI probably will not go very far. In order to qualify for SSI, an individual cannot have monetary assets of $2,000 or more. Without other resources, the disabled adult child will likely only have basic needs met.  So are there other resources that can be used for the benefit of the disabled child?

A Special Needs Trust (also called a Supplemental Needs Trust) can provide a resource for supplemental care for the disabled beneficiary. Supplemental needs can be broadly defined and can be used to enhance lifestyle. Whether that enhancement includes vacations, including paying for a travel companion, other recreation and entertainment, computers, hire an advocate on his or her behalf and pay for funeral and burial costs based on how the Trust is drafted. The Trust will also need to specify that it can’t be used to pay for those needs which are being provided by the government. The good news is that the assets in a properly drafted Special Needs Trust are not counted toward the $2,000 SSI/Medicaid limitation. Even if there is no need for SSI or Medicaid, the disabled child may need to meet the limitation in order to receive other benefits.

There is a problem with a Special Needs Trust – as an irrevocable trust undistributed income is taxable at trust rates. The highest tax bracket of 39.6% is reached at $12,400. Additionally, once the 39.6% threshold is met, there is the 3.8% net investment income tax on capital gains, dividends and interest.  If you do too good of a job of investing, the growth from realized gains and investment income will accrue to the benefit of the US Treasury as much as to your child.

For most of us, we will use our own money to help our children during our lifetime so the resources for enhancing our child’s lifestyle will be used after we’re gone.  So if our goal is to leave resources for our child so that income taxes are minimized, life insurance owned by the trust on the life of a parent (or the lives of both parents) may be the answer.  Proceeds from life insurance are not subject to income tax or death taxes if certain conditions are met. Income tax free and investment income undistributed from a trust can be taxed as high as 43.4%. Since life insurance is not an investment, life insurance proceeds are received free of income tax and, it meets the goal of leaving resources for which the child is the sole beneficiary.

Life insurance in a Special Needs Trust should be a permanent form of insurance and not term insurance. Consider a survivorship policy (also called a “second to die policy”), which would have a lower annual premium. Even if one parent is not insurable, a survivorship policy may still be available.

Federal legislation established the Achieving a Better Life Experience Act (“ABLE”) which allows states to oversee ABLE accounts for those who diagnosed with disabilities prior to the age of 26. A strategy worth exploring is supplementing a Special Needs Trust and contributing to an ABLE account outside of the Trust. Up to $14,000 can be contributed annually to an ABLE account and the account can grow to $100,000, and the funds are available to cover certain qualified expenses. Like a Special Needs Trust, the assets within the account are not considered for SSI/Medicaid eligibility. However, at the death of the beneficiary, any remaining funds are payable to the state. 

Far too many people set up a Special Needs Trust with the intention of funding it as the beneficiary of their estate. The assumption is that there will be money left to fund the trust when they pass away, but given the financial stress in today’s society, that may be a heroic assumption. 

Even worse is leaving money to their other children with the intention that it be used to help the disabled siblings – even when the intentions are good, that money is at risk due to a sibling’s unexpected life events such as divorce and bankruptcy.

While there are other solutions for providing financial resources for a disabled child, life insurance can achieve a number of objectives including minimizing taxes, keeping resources insulated from the government and allowing you to know how much will be available for your child.

Michael D. Roberts, CPA/PFS, CFP®, is a partner of West Railroad Financial Partners LLC ( in Jamesburg, New Jersey and is an investment advisor representative with Woodbury Financial Services, Inc.  Mike has been a financial advisor since 2010.  Mike participates in the Ed Slott Master Elite IRA Advisor program. Prior to becoming a financial advisor, Mike spent 9 years with Coopers & Lybrand (now PricewaterhouseCoopers) and 19 years as the Controller at W.P. Carey & Co.

West Railroad Financial Partners, LLC and Woodbury Financial Services, Inc. are not affiliated entities.

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