Planning to pay for a loved one’s educational expenses can be daunting, and parents of children with special needs face additional challenges. Fortunately, there are strategies that can help you plan without jeopardizing their eligibility for government benefits.
First, establish an individualized education plan (IEP). This document details the special education instruction, support, and services your child needs to be successful. IEPs are covered under the Individuals with Disabilities Education Act (IDEA), a federal law that requires all special education students to have access to a free and appropriate public education. It also mandates that teachers be appropriately trained and have the skills necessary to serve children with disabilities. IEPs are established in collaboration with a child’s school administration, teacher(s), and parent/guardian. It outlines the specific needs of the student and the services required of the school to meet them.
One way to pay for your loved one’s education is by establishing a special needs trust (SNT). This holds money for a beneficiary who has a disability or chronic illness. SNTs are intended to supplement government benefits, such as Supplemental Security Income (SSI) and Medicaid, while preserving the individual’s eligibility for them.
Another advantage of SNTs is that they can help ensure assets are distributed appropriately, as directed by the trust documents. Family and friends can make gifts to an SNT of up to $18,000 per year, per donor ($36,000 per married couple) without being subject to gift tax.
SNTs also offer flexibility in the types of assets used to fund them, including cash, securities, and life insurance proceeds. A common strategy is for parents to purchase a second-to-die life insurance policy, which pays a death benefit to the SNT after the last surviving policy holder passes away. SNTs can even help protect your loved one from falling victim to financial predators, as assets can’t be accessed without the trustee’s approval.
While there are immense benefits to establishing an SNT, there are also some downsides. First, the person you designate as trustee will have complete discretion over how the assets are distributed. This can cause issues if the trustee doesn’t share your intentions or have the same financial priorities as your loved one, which is why it’s important to carefully consider whom you designate as trustee.
Also, in order to ensure your trust is structured properly, you’ll need to work with an estate planning attorney. This is typically worth the expense, considering the peace of mind it provides. Finally, there are ongoing costs and responsibilities to administer and maintain the trust; another reason it’s important to select a willing and capable trustee.
Named after the Achieving a Better Life Experience Act of 2014, ABLE accounts offer another opportunity to provide benefits to individuals with special needs. Similar to SNTs, the assets don’t interfere with benefits eligibility (so long as they don’t exceed $100,000), and contributions can be made by the account holder as well as friends and family members.
When used to pay for educational expenses, withdrawals from ABLE accounts are exempt from taxes. In contrast to SNTs, which are managed by a trustee, ABLE accounts are owned and managed by the individual with special needs. It’s also much easier to access ABLE account assets than SNT assets.
Another benefit of ABLE accounts is that assets can be used for a variety of purposes, including anything that helps improve health or quality of life. This includes basic living expenses, food, employment, education, transportation, etc.
In order to qualify for an ABLE account, an individual must meet one of the following requirements:
• Qualify for SSI by a disability that occurred before age 26
• Qualify for disability insurance benefits, childhood disability benefits, or disabled widow/widower benefits by a disability that occurred before age 26
• Hold a certificate that proves the disability occurred before age 26
Once an individual qualifies, it’s easy to establish an ABLE account through the state’s website. No attorney is needed. It’s important to be aware that ABLE accounts have contribution limits. In 2024, contributions are limited to $18,000 per year.
Another downside is that any assets left in an ABLE account after the account holder’s death may be used to reimburse the state Medicaid agency for any services paid by Medicaid.
Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.