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Family Wealth Transfer, Part IV: Planning For Special Needs

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If you’re a parent, it’s natural to worry about what will happen to your children after you’re gone. But if you’re a parent of a child with special needs, that concern might be intensified with additional worries. Adult children who are living with a disability and who receive U.S. government benefits need to be considered carefully during your estate planning.

Otherwise, your child’s inheritance could disqualify him or her from those needs-based government benefits they count on for basic financial support.

‘Wanting’ vs. ‘Needing’ to Restrict Distributions

When your adult disabled child relies on certain services for financial support, you’ll need to control their inheritance. In this case, however, it’s not a case of ‘wanting’ to control the distributions, as we’ve covered in previous posts. It’s a case of ‘needing’ to control the distributions so that your adult child doesn’t lose services because of maximum income requirements.

This is often the case when there is a disabled child who is dependent on needs-based government assistance for basic expenses like medical care, housing, or even food. If those benefits are ‘means tested’, your child will lose those benefits if they inherit more than just a few thousand dollars.

As you well know, loss of those benefits could be very disruptive to your child’s basic existence. Even if their inheritance covers those needs, that money could run out. When that happens, your adult child will have to requalify for benefits. That could mean being placed on a long waiting list or worse yet: being denied benefits.

Is Your Child’s Inheritance Less than $250,000?

For the wealthiest among us, the care we could provide privately would be greater, more consistent, and more complete than any benefits the government could provide. In cases like that, attempting to maintain ‘means tested’ benefits for the child needs to be weighed against the value of those benefits.

But for others, where the inheritance may be less than $250,000, it’s different.

If your child’s inheritance falls below the quarter of a million mark, it is probably more beneficial for the benefits to continue without interruption. It’s also better for the inherited funds to be used for ‘supplemental or special needs’ of the child throughout their lifetime. Congress agrees…

The Third Party Special Needs Trust

Congress created an exemption to the ‘means tested’ disqualification standard. It’s called the ‘Third Party Special Needs Trust’ and parents who intend to leave an inheritance to an adult child with disabilities should know about it.

This type of trust is created by someone other than the special needs individual— in this case, it’s you, the parent(s). Assets can also come from other family members, friends, or other relatives but they cannot originate from the individual.

Because the Third Party has no legal obligation to leave any assets for the disabled individual, Congress agreed that if they did make a provision through this Trust, the disabled individual would not be penalized.

What Can The Funds be Used For?

The Trust corpus and income can be used for the supplemental needs of your disabled adult child such as:

  • Clothing
  • Entertainment
  • Transportation
  • Travel
  • Recreation
  • Uncovered medical treatments
  • Anything that’s not covered by government benefits and which may be beneficial to your child

Cash should not be distributed, so only distribution in-kind should be allowed. This is important if you want your beneficiary to avoid income tax attribution.

The Self-Settled Trust

For a child who receives a settlement for a personal injury which caused their disability or which occurred during their disability, we have the Self-Settled Trust.

This type of trust exists under the same rules, except that upon the death of the disabled child, the remaining assets could be attached by the government agencies who provided services during your child’s lifetime.

This is actually one very important difference between the Self-Settle Trust and the Third Party Special Needs Trust. There is no such claw back with a Third Party Special Needs Trust. Parents are free to leave the remaining balance of a Third Party Special Needs trust to anyone they wish.

The ABLE Account

The Special Needs Trust was expanded in 2014. Congress added the ABLE account, which stands for Achieve a Better Living Experience. Under this provision, parents can contribute up to $14,000 per child per year into an account that would grow, income tax-free. There is no tax deduction, however.

ABLE accounts are designed to function like 529 College Savings accounts. However, instead of using the funds for college, the disabled child would use funds from the ABLE account for supplemental needs like those described above. Amounts accumulated in excess of $100,000 would be counted as a resource for the child. Otherwise, the account and use of the funds would not disqualify the child from ‘means tested’ benefits.

Important Tools in Your Estate Planning Toolkit

In your journey through the estate planning process, you’ll find that supplemental and Special Needs Trusts are not the norm. But that doesn’t mean they’re not very important tools for parents facing special circumstances such as providing for an adult disabled child.

In fact, it’s quite often the case that even those who have no use for this type of trust know someone who could benefit from this planning. It’s a very useful tool to control asset distribution for people like you, who face circumstances that are unique and which come with special concerns. Thanks to the Third Party Special Needs Trust, families no longer need to worry about limited options when it comes to providing for their adult disabled child.

More options, combined with helpful advice from a professional financial advisor who’s well-versed in nuances of wealth management such as this, point to a brighter future and better care for all your loved ones going forward.


Scannell Wealth Management is a team of investment professionals registered with HighTower Securities, LLC, member FINRA and SIPC & HighTower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.

HighTower Advisors LLC, its affiliates and HighTower Advisor’s Financial Advisors do not provide tax or legal advice. You need to consult your legal and tax professional when making any investment.

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Scannell Wealth Management is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.