The Reality of Risk
I had an excellent time at the Chicago Autism Connection’s Spring Fling resource fair, this past Saturday. There was an excellent panel of fathers, who shared their perspective as fathers on raising their children with autism. There was another excellent panel of young adults with autism, sharing about their lives and accomplishments. Terri Steinberg gave a great workshop on creating a life plan, and Zoubida Pasha gave a super talk on the Individuals with Disabilities Education Act (IDEA). At least I presume, both talks were fantastic, given what I know of both women. Concurrently, I was walking interested parents through Social Security, Medicaid and Medicare benefits, the eligibility criteria for these benefits and how their children might progress through the benefits over their lifetimes. As I’ve discussed before in these blogs, some of the government benefits are “means-tested”. A less of a nice way of saying this is that you have to be poor to get them. Supplemental Security Income (SSI) and Medicaid fall into this category. As a result, they have strict income and asset requirements. Generally speaking, a recipient cannot earn more than $1,220 and cannot have more than $2,000 in the bank
Where there is a rule, there is usually an exception, so we also talked about two of the exceptions to the $2,000-in-the-bank rule: ABLE accounts and Special Needs Trusts. Both of these structures can hold cash and, in the case of a trust, other resources in such a way that they do not “count” as resources for purposes of SSI and Medicaid eligibility and benefit calculation. One of my workshop attendees than asked whether Special Needs Trusts and ABLE accounts were "safe."
In a manner of speaking, assets held in a properly written special needs trust or an ABLE account are indeed "safe" in that they cannot disrupt an individual’s eligibility for SSI and Medicaid. As the participant rephrased her question—several times, in fact—it became clear that she was using the word “safe” not to mean “safe from consideration by Social Security or Medicaid” but rather “safe” in the sense that a US Treasury bond is considered “safe.” This thing is that ABLE accounts and Special Needs trusts are both ownership structures. The financial safety of an asset is determined not by its ownership structure but by the nature of the asset itself.
ABLE accounts are investment accounts. The owners, who are people with disabilities , can chose to invest his/her account funds in predetermined portfolios that include index mutual funds and exchange traded funds (ETFs), managed by large firms such as Vanguard, Blackrock, Schwab and others. In Illinois, there are six such portfolios, each having a different risk profile from the conservative, which invests 60% of its assets in cash, 30% in bonds and only 10% in stocks to the aggressor, which then invests 10% in bonds, 90% in stocks and puts nothing in cash. The conservative portfolio will have a very low volatility, given that a majority of its assets are in cash—the value of which does not fluctuate, of course—and bonds, which are very stable, but do rise and fall with the market. The aggressive portfolio, on the other hand, will be much more volatile because 90% of its assets are subject to the movement of the stock market. Hence, all portfolios are subject to some degree of market and other types of risk and may lose as well as gain value.
ABLE accounts are considered municipal securities and are not registered with the Securities and Exchange Commission. As such, they are not brokerage accounts and are not covered by the Security Investors Protection Corporation (SIPC). Many ABLE accounts, including Illinois’, also feature a checking account at a recognized bank like Fifth Third Bank. Checking accounts within ABLE accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, although that limit would also include any other account held by the same owner at the same bank. All the other investment options are not FDIC insured, a fact that the plan document states very clearly.
A special needs trust can own pretty much any type of asset. Therefore, if a special needs trust has a checking, savings or money market account within a bank, that account is insured by the FDIC. If the trust owns a brokerage account, the securities in the brokerage account have limited protection under SIPC. It is, however, important to understand the limitations of SIPC. As stated on their website: “SIPC works to restore investors assets when a brokerage firm fails financially.” SIPC does not protect any decline in asset value due to market movement or the financial failure of the corporations that have issued equity or debt securities. SIPC also does not protect assets in cases of fraud. The fact that they are owned by a special needs trust rather than a “natural person” does not prevent stocks, bonds, mutual funds, index funds, derivative, currency, real estate, collectibles or any other possible investment asset from experiencing a decline in value due to market fluctuations.
All financial investments are subject to risk. Risk is a necessary trade off with potential growth or “return”. However, one can limit the risk exposure of an ABLE account or any account owned by a Special Needs Trust by keeping the funds in cash or in a very safe investment like a money market fund or a bank CD. But the best money markets are only paying 2.5%, and the best CD rates barely hit 3% for a five-year commitment. At those rates, it will take 24-29 years for the investor’s money to double. On the other hand, the various ABLE investment portfolios have, with the exception of the conservative one, seen annual growth between 4.5% and 13.7%. Of course, ABLE are quite new, so they only have a short recorded history. But the stock market as a whole has returned an average of 7-10%, depending on which time period and which calculation method you use. Past performance does not predict future returns. Nevertheless, higher risk does correlate with higher-expected returns and ABLE account owners and Special Needs Trust trustees must evaluate how to best employ this trade-off in the service of the beneficiary with a disability. A competent financial planner can help make and monitor these kinds of decisions. You cannot avoid risk, you can only manage it.