Planning for a Disabled Child

December 23, 2019 10:22 am

Kristina M. Mello, MBA

Financial Planner and Advisor

Caring for a disabled child requires planning for the near term and the future but understanding the best strategies to utilize can be challenging, as the rules and regulations are often complex and confusing. Thankfully, there are tools available to help caregivers put a plan in place to assist the disabled child financially, and, with the help of a financial advisor, the caregivers can navigate these solutions to determine the right fit for a family.

Special Needs Trust
A special needs trust, also known as a supplemental needs trust, can be very helpful for a disabled person as it allows the beneficiary access to the assets held in trust for their benefit, while not interfering with needs-based government benefits. The SNT is a legal entity that can support an individual with physical or mental disabilities, and the rules of the trust can be specified by the donor(s) to ensure their intended use of the assets are honored. In addition, designating a successor trustee will also help ensure the individual remains cared for after the grantor has passed. Therefore, it can provide peace of mind to family members who wish to earmark assets for the disabled, or leave them an inheritance, without impacting their government benefits such as Supplemental Security Income or Medicaid.  Regarding taxation, all earnings that are received in the trust are taxable. Whether it is taxable to the beneficiary or taxed at the trust level depends on how the trust is established. Because trust rules differ from state to state, if you are considering a special needs trust consult with an attorney to see if this type of trust makes sense for you.

529A Plans
Thanks to legislation passed in 2014, the Achieving a Better Life Experience Act established the ABLE account, which allows a disabled individual who is diagnosed prior to their 26th birthday* to utilize an account that pays for disability expenses. The purpose of this act was to help provide a tax-favored savings vehicle that would allow a disabled person the ability to save without impacting means-tested government benefits. Similar to 529 college savings accounts (derived from Section 529 of the IRS code), contributions can grow tax deferred and withdrawals can be taken tax-free if used for qualifying disability expenses for the disabled person. Some of these expenses may be related to transportation, health care, housing, education, retirement and more.  Qualified disability expenses are intentionally broadly defined by the Treasury Department and IRS. For further detail about qualifying expenses, click here.

Unlike the college savings plan, however, contributions to the 529A ABLE account are based on the beneficiary, not the contributor. For example, in 2020 the contribution limit per beneficiary is $15,000. In addition, as a result of the Tax Cuts and Jobs Act, additional contributions are allowed up to the federal poverty limit of $12,490, if the disabled individual is working and wishes to contribute some of their own compensation (subject to change in 2025). Thus, in this case the contribution limit from all sources is capped at $27,490 per year. While contributions to an ABLE account are not tax deductible on the federal level, some states offer income tax deductions for contributions.

Furthermore, the account balance of a 529A must not exceed $100,000, or the amount exceeding this threshold may be counted as resources of the individual. For example, Supplemental Security Income (SSI) can be suspended until the account value drops below $100,000. It is important to note, if the individual is not receiving SSI benefits, the value of the account can grow to the maximum amount set by each state. Thus, maintaining the balance of the 529A in which it achieves maximum growth potential while not exceeding the threshold, becomes a balancing act. In this vein, it is often a best practice to utilize some funds from the account for current expenses while not draining the balance too low so it can still experience growth. A financial advisor can help manage the investments within the account, while also incorporating distributions for qualifying expenses as part of a family’s financial plan.

The ABLE account serves as a valuable tool for allowing parents and caregivers a way to save for their disabled child while not being penalized for government benefits that are means tested. It also allows the account to be invested and grow tax deferred, giving the contributions a chance to appreciate without worrying about taxability within the account. Because states have their own rules and regulations regarding ABLE accounts, it is important to understand these rules, particularly whether or not there is a Medicaid recovery provision applicable in your state. If there is a Medicaid recovery provision (right now 45 out of 50 states have this), spending down the 529A account balance before the beneficiary dies will be important. If there is a balance in the account upon death, the state can reclaim the account balance to recover Medicaid benefits paid during the individual’s life. While this caveat does make planning appropriately even more crucial, it is generally not a deterrence against opening an account as the benefits are numerous.

Whole Life Insurance Policy
Many parents who care for a disabled child worry about how their child will be supported after they are gone. While an ABLE account can help support the disabled individual in the present and future, another option parents may consider is a whole life policy, with the Special Needs Trust as the beneficiary. This will allow for a lump sum of assets to be earmarked for the child, and with the trust as beneficiary also provide a smooth transition of assets where the child does not need to worry about the logistics and can keep operating their daily lives as normal. Because life insurance proceeds are generally tax-free, the disabled’s assets will be replenished, providing greater support to the child after their primary caregivers have passed.

Every situation is unique, and you may find yours can benefit from one of the strategies discussed, or a combination thereof. Engaging the help of a financial advisor and attorney will be paramount in order to establish and effectively utilize the tools available to you for long term planning. Speak to your advisor to learn more about ABLE accounts offered in your state.

*Note: ABLE accounts can be opened at any time, but the diagnosis must have occurred prior to the beneficiary’s 26th birthday.


Kristina Mello, MBA serves as Financial Planner at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Kristina’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or our parent company, Focus Financial Partners. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference. Certain statements contained herein may be statements of future expectations and other forward-looking statements that are based on SPIA’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words “may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue” and similar expressions identify forward-looking statements. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. SPIA assumes no obligation to update any forward-looking information contained herein.