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Financial Challenges When Raising Children with Special Needs

Common financial issues and strategies to address the need for supports, resources, and annual planning

All children have their own unique personalities, character traits, gifts, and limitations. As parents we find joy in their unique personalities, embrace certain character traits and refine others. We help to cultivate their gifts and help them overcome their limitations. Children bring us joy and present us with challenges. Parents of children with disabilities will find joy in their children that others may not have the opportunity to experience. They also face unique challenges others do not have to face. Among these challenges are financial concerns such as paying for additional medical and counseling expenses, providing financial support for a child’s entire life, caregiver expenses, home modification costs, and providing financial support after the parents have passed away. In addition to government assistance programs, the federal government and many state governments have developed programs and tax breaks to help families with disabled children address their unique financial goals. The following is a brief summary of just a few of these programs and tax breaks.

“We cannot build the future for our youth, but we can build our youth for the future.”

Franklin D. Roosevelt

Special Needs Trust (SNT)

The most common tool families may be aware of is the Special Needs Trust (SNT). SNTs provide a means for assuring that an individual with special needs has access to financial resources without limiting their qualification for government assistance, such as social security income, Medicaid benefits, subsidized housing and other need-based benefits. These trusts provide income so the beneficiary may pay for non-essential expenses, such as travel or vacation, entertainment, training programs, educational material, etc. Most SNTs are funded via gifts from their parents, life insurance proceeds or inheritances. The trustee is responsible for managing trust funds, distributing or spending funds for the sole benefit of the child / beneficiary, and a host of other administrative duties including filing federal and state trust tax returns. The trustee is also responsible for making sure the trust complies with the rules established for special needs trust, so choosing an appropriate trustee is an important step.

An SNT may be funded with assets personally owned by the special needs individual / beneficiary themselves. Such trusts, often referred to as self-settled SNTs, may be necessary in cases where the child receives payments from a personal injury settlement or income from employment. In that case, the trust must be drafted carefully – for example, it must contain “payback” language that requires the trust to reimburse the state’s Medicaid agency for any medical assistance payments upon the beneficiary’s death.

One alternative to establishing an individual SNT that has become popular in recent years is the pooled special needs trust. These trusts are managed by non-profit organizations and may appeal to those who are concerned with finding the right trustee and are looking for professional management of the trust by individuals who are familiar with the SNT rules.

ABLE Accounts

The Achieving a Better Life Experience (ABLE) Act of 2014 created a new type of tax-favorable saving vehicle referred to as a 529A, or ABLE account. One of the primary benefits of ABLE accounts is that they allow families to save and invest funds for the care of a disabled family member while maintaining eligibility for public benefits such as Social Security, Medicaid, and public housing. Another attractive feature is that capital gains may be withdrawn from ABLE accounts without incurring a federal tax if they are used to pay for qualified expenses. Qualified expenses include payments made for items such as education, housing, transportation, employment training and support, assistive technology and personal support services, health, financial management and administrative services, and legal fees.

A few notes regarding ABLE accounts:

  1. The maximum contribution to an ABLE account is $15,000.
  2. Beneficiaries of ABLE accounts who are over age 18, not a dependent or full-time student, and meet the income requirements, may now contribute part or all of their employment earnings to their ABLE account (up to $12,490 in 2020). They may also claim the Saver’s Tax Credit on up to $2,000 of their contribution.
  3. Tax-free rollovers between 529 plans and ABLE accounts are permitted if the ABLE account beneficiary is the same or is a family member of the beneficiary.
  4. In order to be eligible, an individual must have a disability with an age of onset before the age of 26. ABLE accounts may still benefit those over age 26, but only if the age of onset occurred prior to age 26 (bills have been proposed to change the age of onset requirement to age 46).
  5. Accounts that exceed $100,00 may impact specific social security benefits.
  6. ABLE accounts are established by the states. Families may have the option to select a plan in a state other than their resident state (some plans do not allow). The ABLE National Resource Center website (Ablenrc. org) provides a tool that allows families to compare the features of various state plans.
  7. States have various limits for the total amount of savings that may be held in their ABLE accounts, ranging from $235,000 to $529,000.

Tax Breaks

Taxpayers may be able to deduct unreimbursed medical expenses. Under current law (2020), the deduction is limited to expenses over 7.5% of adjusted gross income. It may be possible for parents to claim a medical expense deduction for expenses paid (including travel costs) for attending a seminar or conference if the topic of the event is related to the child’s physical or mental challenge. In addition, costs incurred to modify a home to improve accessibility may also be claimed as a medical expense.

Child and dependent care credit – A credit may be available of 20% to 35% (depending on the taxpayer’s adjusted gross income) on up to $3,000 of day care and similar costs, $6,000 of costs for two or more dependents.

Providing for Children When the Parents Are Not Able

Contingency planning is important for all families, but especially for parents of children with special needs. From a financial standpoint, where will the funds come from if the child’s parents pass away. Life insurance may play a key role in protecting the child’s future. Parents should consider naming a trust that is specifically designed for the needs of their child as beneficiary of any life insurance policies. Parents may also want to explore ways to protect their disabled child and assure their child has someone there to advocate for them should they predecease their child. Forming a microboard may fulfill these needs. Microboards are small groups of committed family, friends and professionals who join to form an informal team, or a more formal family directed non-profit organization to address the needs of a physically or intellectually challenged family members.

If you wish to discuss special needs planning, the effect on your unique financial plan, and strategies for improvements, call Symphonic at 1-800-926-1647, send an email to, or contact your Symphonic Financial Advisor.

Joe Calhoun, CFP®

Joe Calhoun is the Director of Financial Planning for Symphonic Financial Advisors, guiding our Financial Advisors in delivering custom-tailored planning services for clients.

DISCLOSURES: The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Past performance is no guarantee of future performance. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.