Financial tips for parents of children with special needs
An ABLE account and a special needs trust are important tools.
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A child with special needs requires special care and attention—and the finances needed to ensure their ongoing care require special attention, too. If your child has been diagnosed with a disability—and may require early intervention as well as ongoing support throughout their lives—you no doubt have questions about where to start to ensure they have the best possible childhood and beyond. To find out the best practices for those living in the U.S., we spoke with some financial experts to help you get some answers.
Take a look at your existing resources
Raising a child who has a disability may involve a number of additional and ongoing medical costs as well as hands-on therapy sessions. How to pay for these costs is a top concern for parents.
“When children are younger, there can be significant concern for medical co-pays and insurance coverage costs,” says Bob Brogan, an attorney and treasurer on the board of directors of the Special Needs Alliance. “Parents can sometimes base decisions of who they work for or whether both parents can work, based on a combination of the health benefits offered by employers and the level of hands-on care the child needs.”
Open an ABLE account
A federal law passed in 2014 called the Achieving a Better Life Experience (ABLE) Act gives people with disabilities who are disabled before the age of 26 the ability to set up tax-free savings accounts. These ABLE accounts also allow people to save without affecting eligibility for Supplemental Security Income (SSI) and Medicaid. The money in an ABLE account can be used to pay for the costs of treating a child’s disability and for medical equipment, housing, hiring a companion, and paying for therapies not covered by insurance, says Cynthia Haddad, wealth advisor and partner at Special Needs Planning, a specialty practice of Affinia Financial Group in Burlington, Massachusetts.
Unlike a typical savings account, where the interest is taxed at your earned income tax rate for the year, you won’t pay any taxes on the funds in an ABLE account. Distributions from the ABLE account are tax-free as long as the money is used toward disability-related expenses.
Similar to 529 plans that allow you to save for a child’s college education, ABLE accounts come with a program manager, investment manager, and program bank. You may only open one ABLE account per child and contribute a maximum of $16,000 per year.
Your first step is to look for an ABLE account program in your state. From there, you may want to compare it with other states’ programs, as many ABLE programs allow people from other states to join. How do ABLE accounts differ? Some may charge annual fees, have minimum required deposits, or come with debit cards for easier access to funds. At the ABLE National Resource Center you can compare ABLE programs using an online tool.
Consider a special needs trust
A special needs trust is a legal trust that parents create with their child as the beneficiary. It differs from a standard trust in that money saved in a special needs trust won’t affect the child’s eligibility for Medicaid and SSI. And, unlike an ABLE Account, there’s no limit to how much you can contribute.
For example, parents may name the child’s special needs trust as a beneficiary in their life insurance policies. The life insurance benefits would go to the trust and not the child directly, because a direct inheritance to the child would impact the child’s eligibility for government benefits. “Any inheritance to the child with special needs should be left to the special needs trust,” Haddad says.
You’ll need to hire an attorney to establish a special needs trust—and it won’t come cheap. “It varies. We see them $2,500 to $5,000,” Haddad says. “Most times, it is part of the family’s estate plan.”
As with any trust, with a special needs trust, a trustee is named and manages the trust’s finances. “Only the trustee can write the checks,” says Karen Greenberg, director of Prosperity Life Planning, a nonprofit based in Delray Beach, Florida, that helps families with children with special needs with their finances. “It could be a parent, grandparent, or it could be another relative.”
A trustee also could be a hired professional. The trustee manages the trust’s financial accounts such as a checking account, savings account, brokerage account, and certificates of deposit. “When deciding on who to name as a trustee of the special needs trust, seriously consider appointing a corporate or professional trustee over a family member, as the professional will be well versed in all the difficult-to-navigate rules surrounding public benefits,” Brogan says. “A family member could be named as a trust protector to ensure that the professional trustee is doing their job for the benefit of the child.”
If you choose to have a corporate or professional trustee, make sure they have experience with special needs trusts and not just general trusts, says Amy O’Hara, a partner in Littman Krooks in New York and vice president of the board of the Special Needs Alliance. “The job requires additional work to make sure nothing is done to cause a loss of benefits for the child.”
A contingent trustee is also named in a special needs trust, and this person would take over management of the trust if the trustee dies.
Look to the future and consider appointing a guardian for your child
While a trustee manages the special needs trust and distributes assets, a guardian is responsible for managing the day-to-day needs of a child including medical care, housing, and education.
It is possible to name the same person as guardian and trustee for your special needs child but doing so puts a lot of responsibility on an individual. It may be better to divide responsibilities between family members or hire a professional to act as trustee of the special needs trust.
With the birth of a baby, it’s essential to consider the hard question of who might be able to raise your child in the event that you die or become otherwise unable to do so. But with a child who needs special care as they grow and who may require full-time caretaking throughout adulthood, naming a guardian you trust is absolutely imperative.
Take some time to think it over. Do you have a relative such as a grandparent, sibling, or close friend that you would trust with the care of your child? Once you decide, you will want to name that person as the guardian for your child in your will.
“If you come from a really small family, you should strongly consider naming a best friend [or] a niece or nephew or distant cousin whom you trust, as an alternative to leaving it to a well-meaning judge [should custody need to be decided by a court],” Brogan says.
In some instances, a non-profit organization can be named as a guardian of a disabled child. “Depending on the state where you live, there are some nonprofit organizations which will serve as the child’s guardian,” says O’Hara.
It is also a good idea to name a backup or substitute guardian in case the original guardian is unable to serve.
Appointing a suitable person to look after your child in the event of your death is an important choice, so be sure to do your research and spend the time necessary to find the right person.
Put your child’s current and future needs in writing
To prepare a guardian—or even someone who might babysit your child—you should create a letter of intent. This letter describes the details of a child’s care, and Greenberg calls this letter a “mini biography.”
A letter of intent should include a child’s medical history, medications, lab test results, everything there is to know about the child’s condition, and special needs. As things change, make changes to the letter of intent. “It’s a fluid sort of document that will change every so often, maybe many times a year,” says Greenberg.
You may also want to include in the letter a child’s likes, their clothing size, even their favorite color, says Haddad. You want their world maintained when you can’t be there. “It’s very important to think about [the vision] you have for your child,” Haddad says.
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