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Navigate Special Needs Planning Obstacles with a Good Coach

This past Sunday, my eleven-year-old son competed in his first ever parkour competition. For those of you who don’t know—like me a year ago—parkour is an obstacle course challenge race of the type made popular by “American Ninja Warrior”. Each contestant’s “run” is scored in two ways. First, one can obtain a certain number of points by completing each obstacle correctly; for example, by not touching the obstacle when jumping over it, by putting a foot to the ground while crossing a balance beam, or by reaching a certain height on the warp wall. Second, the contestant’s speed is clocked. Clearly there is a trade-off between style and speed. The more carefully a contestant clears each obstacle, the more time s/he is likely to take to complete the entire course. Conversely, the faster one goes, the more likely one is to be a bit sloppy on clearing the obstacles. Each competitor employs the mix of style and speed that is likely to put him or her farthest up the rankings. Points are the most important consideration, but when two competitors have the same number of points, the one with the faster time ranks higher.

Since almost no one has the money to do absolutely everything that he or she would like, almost every financial planning strategy represents a trade-off. Is it better to pay off debt faster or build one’s retirement savings faster? Is it better to pay higher premiums for a lower deductible health care plan or the other way around? Is it better to get the tax break now from contributing to a traditional 401(k) or IRA, or to get it later by contributing to a Roth version of either of those? Is it better to invest in a portfolio with higher risk/return potential or one with more stability? Is it better to sink your available funds into your residence or your investment portfolio? In every case, the mix of answers will depend on the risk tolerance, stage of life, and other specific attributes to the family doing the planning. For families with special needs, there are some very particular trade-offs.

Is it better to fund an ABLE account or a Special Needs Trust? Funds contributed to an ABLE will grow tax-deferred, and in most cases, can be withdrawn tax-free. First-party and third-party funds can be co-mingled in an ABLE, and funds withdrawn from an ABLE to pay for food and shelter will not trigger an In-kind Support and Maintenance (ISM) reduction in SSI. On the other hand, ABLE funding is limited to $15,000 per year plus whatever the working beneficiary can contribute from working income. Only cash can be contributed and investment options are defined by the financial institution maintaining that particular ABLE program. Donors can contribute an unlimited amount to a Special Needs trust (although first-party and third-party contributions each require a separate trust), and the trust can invest in any type of asset. And the trust will have to pay tax on investment income not paid out to the beneficiary. There is nothing stopping a person with a disability from being the beneficiary of both an ABLE and one or more special needs trusts. Talk to your financial planner, attorney, and tax advisor.

Is it better to use life insurance or investment assets to fund a Third Party Special Needs trust? Life insurance (usually on the parents of family member of the trust beneficiary) has a definite payout. You know exactly how much the minimum death benefit will be for a certain amount of premiums paid in. But you have to pay those premiums consistently, or the policy will implode leaving you with no future payout, and, if you borrowed some of that cash value back, a big current tax bill. And if the potentially insured persons have less-than-stellar health, the premiums could be very high, or it might be impossible to get the policy through underwriting. Conversely, if you have money, you can buy securities in an investment account, and you can contribute more in the month if you get a bonus and less in the month if you have a big car maintenance bill. And if you use index mutual funds or exchange-traded funds, the costs are likely to be lower than the mortality and expense charges of an insurance policy. But securities are riskier because both the equity and the bond market have volatility and can drop, sometimes sharply. Relying on each method to fund a portion of the trust might be a good approach. Talk to your financial planner.

Is it better to start with a stand-alone Special Needs Trust or a testamentary one? You can create an independent special needs trust from the beginning, or you can put language in your will that creates one when you die and leave assets to your family member with a disability. This latter method clearly saves you on estate planning costs. It may be perfectly sufficient if you are the only one whose assets will fund the trust. On the other hand, if another donor predeceases you, their assets have no trust into which to pour. And, if you plan to fund the trust with life insurance, the trust needs to exist at the time it is named for a beneficiary of the policy. Talk to your attorney on this one.

Is it better for a person with a disability to work first or apply for benefits first? As I have discussed in several blog posts, Social Security’s definition of “having a disability” hinges largely on how much an applicant’s condition prevents him or her from engaging in Substantial Gainful Activity (SGA), which is defined as making more than a certain amount in monthly gross earnings ($1,220 for 2019 if not blind and $2,040 if blind.) If a person with a disability is already working at the time s/he applies for disability benefits, it might be more difficult to argue that s/he could not earn above the SGA threshold. On the other hand, the person with disabilities can earn Social Security coverage credits by working; and these credits, if accumulated at a young age, can quickly lead to eligibility for both Social Security Disability Insurance (SSDI), which has less restrictions than Supplemental Security Income (SSI) and Medicare, for which SSDI is the necessary precursor if one is younger than 65. It is definitely a balancing act, but your disabling conditions may definitely be such that you can work enough to earn credits but not so much that you exceed the SGA threshold.

My son made it through the competition with style and speed scores that put him in eighth place in a field of twenty-five. Not bad for a first time. Throughout his whole first competitive season, he will probably play around with combinations of speed and style to see which might get him to the coveted top three spots that bestow medals. He has his coach, with years of professional experience, to help him figure it out. It’s not quite as easy to reconfigure your financial or estate plan, however. Thus, make sure you have professional, experienced coaching in your financial planner, attorney, and tax advisor.

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