Plan for Your Child with a Disability’s Financial Security When You’re Gone

Most parents want to share their assets with all of their children when they die. Parents of children who have intellectual and developmental disabilities (IDD), however, often worry that doing so will make their child ineligible to continue receiving services through Medicaid.

People with IDD who receive Medicaid funding for their services cannot remain on Medicaid if they have more than $2,000 in financial assets. States review this monthly, and families fear the consequences their loved one would face if they are over that limit.

“There is still a perception that their child has to be completely excluded from any sort of financial benefit from their estate,” Dittman said. “So I talk with them about creating a third-party special needs trust for their loved one.”

When he talks with parents about it, Dittman said, some don’t believe him because they’ve been told otherwise. Most often, he said, the incorrect information has come from an attorney who is not familiar with special needs trusts—it’s not something most people need to think about. 

Creating a special needs trust is not difficult, he said. There are a few things people must decide upon and then take action. Here’s what to consider:

• When will the trust come into existence?

  People have the choice to set up a trust now or have one set up upon their death, and the latter is more common with Dittman’s clients.
  “People can choose to amend or create a new will or revocable trust,” he said. Upon death, the person’s will or trust will direct that a portion of the estate be paid directly to the special needs trust.

• How much will go into the trust?

  While there is no limit on how much can be placed into a special needs trust, Dittman said things to consider include the age and abilities of the child with IDD.

  “From an estate planning standpoint,” he said, “it doesn’t always make sense to divide assets equally. It may not be the best use of the assets. Based on the severity of a person’s disabilities, sometimes it will be hard to actually use the money from the trust.”

  Examples include serious physical disabilities or age, which can limit a person’s ability to use the funds for extras like hobbies, entertainment or travel.

• What assets will be used to fund the trust?

  Dittman said to consider which assets will come with a tax burden and which will not. Many IRAs will have a tax burden, while life insurance will not, he said. He recommends using assets that are the most tax-efficient.

  “Some assets work really well and some are more difficult,” he said.

• What happens to funds remaining in the trust when the beneficiary dies?

  The special needs trust will be used for all the person’s last expenses, including funeral costs. The final decision people need to make is what happens to the rest.

  “Some choose to have it go back to the family,” he said. “Many choose to do charitable giving.

  ”He said about 50-60% of the families he works with who have a loved one served by Mosaic choose to give some or all of the remaining trust to Mosaic.

Some families choose ABLE accounts to provide assets to their child with a disability. ABLE accounts are savings accounts that allow the person to have more than $2,000. While the intent of ABLE accounts is good, they have limitations and shouldn’t be seen as an alternative to special needs trusts. For example, current law limits the amount which can be placed in an ABLE account in a given year to $20,000.

“Additionally,” he said, “in most states, ABLE accounts have a payback requirement after the person dies so that assets remaining in the account go to the State, not to someone the family designates.”

Dittman said the biggest thing he advises clients is to be vigilant. 

Protecting the best interest of the person with a disability requires knowing if other people, such as a grandparent or sibling, have named that person as a beneficiary in an estate plan or on life insurance. While their motivation is good, he noted, that can end up having the person being denied the Medicaid benefits they need. 

For someone considering how to leave assets to a child with a disability, the first thing to do is contact an attorney who routinely works with special needs trusts. One organization that will help locate such an attorney is the Special Needs Alliance. Explore Mosaic’s planned giving resources to learn more.