September 7, 2016

Savings Options for Special Needs Individuals

by: Jillian Strunk

About 15% of children in the United States have developmental disabilities, including Down syndrome, cerebral palsy, intellectual disabilities, among others. With the great advancement in medical care, these individuals now have the chance to live long and full lives. This creates the need to provide financial support for their future as independent individuals for a much longer period of time. Luckily, there is a growing list of options to save for special needs individuals without disqualifying them from their disability benefits.


529 – ABLE Savings Accounts

In December of 2014, the Achieving a Better Life Experience Act (ABLE) was passed. ABLE allows families and individuals with disabilities to maintain investment accounts for qualified disability expenses tax-free without losing eligibility for public benefit programs. They are similar to 529 College Savings Accounts and 401(k) retirement accounts. The money deposited into the account is invested in different options allowing the growth of savings for long-term care. The money can be withdrawn at any time and is not taxed so long as the funds are used for approved expenses, including basic living expenses like rent and utilities, employment expenses like job-training, and wellness expenses like health insurance premiums and adaptive equipment. In Ohio, the first state to enact ABLE, these savings accounts are called STABLE accounts. There are a few minor fees for account maintenance and an initial deposit of $50 is required, but enrollment is online and very user-friendly.


Nonprofit Pooled Income Special Needs Trust

Managed by nonprofit organizations, these trusts receive funds from many individuals and pool them together for investment. This pooled fund is managed by a trust adviser who makes decisions on the investments. Each individual investor is treated exactly the same. This means that when a trade is made, it is made for everyone in the pool, not just one individual. The larger amounts created by the pooled funds increase the potential for growth. Using distributions from the trust, the special needs individual can increase their quality of life without interfering with their eligibility for government benefits. The individual can use money from the trust account for services that are not paid for by insurance or government benefits, but which provide benefits to the disabled individual such as telephone service, cable tv, vacations, and adaptive equipment.  Be sure to check the rules of the specific trust before entering, as some have rules on the frequency of distributions and what happens to the remaining funds after death.


OBRA Trust

Named for the Omnibus Budget Reconciliation Act of 1993, OBRA trusts are first-person trusts. This means that the assets funding the trust come from, and belong to, the disabled individuals themselves, often from a legal settlement or an inheritance.  OBRA Trusts are not included as assets when determining public benefit eligibility.  Funds within an OBRA trust can be used for anything public benefits don’t cover.  These trusts have more regulations, but are beneficial if the disabled individual is expecting a sudden windfall of cash.  Upon the death of the individual, the remaining funds are used to reimburse the government for previously received Medicaid benefits.


Third-party Special Needs Trust

The most common type of trust used to benefit people with special needs, in a Third-Party Special Needs Trust a donor, such as a parent or grandparent, can set up a trust with the disabled individual as the beneficiary.  This allows individuals to give money to their disabled loved ones without impacting their eligibility for benefits.  A benefit to a third-party special needs trust is that distributions are not limited to a specific list of supplemental needs.   Another benefit to this type of trust is that the funds never belong to the beneficiary, meaning upon death, unlike first-party and pooled trusts, the government is not entitled to reimbursement for previously paid benefits.   The remaining assets in the trust can pass to other beneficiaries at the donors’ discretion.


Planning for the future of your special needs child can seem like a daunting task. These 4 options, among others, are available to assist in securing your child’s future without disrupting government benefits. Most trust accounts require the filing of federal Form 1041 and STABLE accounts require Form 1099-QA and Form 5498-QA to be include with the federal Form 1040. If you need help filing these form for your special needs child, call Hobe and Lucas for guidance! (216)524-8900

Hobe & Lucas Certified Public Accountants, Inc. is a full-service accounting and business consulting firm dedicated to providing clients with exceptional value.

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