Exploring Underutilized Financial Options For Special Needs Families

Amy Hubble |

Happy August!

I had originally intended to write this newsletter exclusively about special needs planning, a topic near to my heart; but, given the recent volatility in the financial markets, I will address that first (briefly).

If you’ll remember back in January, I pointed out that the US Treasury yield curve had begun to invert, which could mean only one of two things:

  1. The Fed would soon drop short-term rates in response to the coming economic catastrophe, or
  2. Demand for longer-term debt would fall and cause longer-term yields to rise until equilibrium is reached in a healthy economy.

Well.  Since January, the US has continually posted strong employment figures, stable earnings, and overall, maintained a healthy and manageable inflation rate of approximately 2% a year.  Unfortunately, the rest of the world has not been so lucky, thanks partially to the zero-sum tariff war being waged on the rest of the world, continued Brexit worries, and deflationary pressure on global central banks.

What this all means is that demand for US dollars has never been stronger, so option number two is off the table--for now.  Which leaves us with option one, the Fed must lower short-term interest rates, a move they announced last Wednesday at their monthly policy meeting.  The market rewarded their efforts, and all was well, until the next day, when it was announced that the China/US trade negotiations had failed (again).  

What is very important to grasp here is that the US economy cannot thrive in a vacuum.  US companies depend on global demand to drive growth--and a strong dollar coupled with the ongoing trade war with China negatively affect corporate earnings…which negatively affects stock prices.

This game of “trade deal chicken” has been repeated at nauseum all year long, with the market oscillating between falling on news of renewed trade tensions and bouncing back when rumors of a deal re-emerge.  While I’m confident the game is not over, the markets have this time, decided to take them at their word, and stock prices have taken a tumble.

Now, you probably want to know what we at Radix are doing about it?

We’re doing what we always do, keeping to our discipline. 

None of our strategies are short-term in nature and all our portfolios are positioned well to perform over the long-term.  History has never rewarded those that try to time the market by jumping in and out, and in response, all of our strategies are designed to withstand and recover from even the worst of economic conditions.

Now that we got that out of the way, let’s talk special needs planning!

Chances are, you, or someone you know, has a child or family member with special needs.  According to the US Social Security Administration, almost 4% of the population (over $13.5 million Americans under the age of 65) currently receive social security disability (SSI/SSDI) payments on a monthly basis to cover necessities, like food and shelter.  The rules are complicated, but a key point is that a special needs child cannot own assets in their own name, and still qualify for this government assistance. 

This creates an additional financial burden for parents of special needs children who must not only save for their own retirement but also provide for the ongoing care of their adult special needs child after they’re gone.  To continue to receive means-tested public disability payments, a special needs adult cannot have monthly earnings of over $1,220 for 2019.  That means they can’t inherit money directly.  NOTE: If you have a special needs child, at minimum, make sure you have a will in place that either establishes a third-party Special Needs Trust (SNT) for their benefit or intentionally excludes them.  A guardianship is not enough.  If this is not done, a trust can still be established, but a first-party d4A or “self-funded” SNT will be subject to the payback of Medicare benefits.

Special Needs Trust creation and administration can be expensive and complex, so in recognition of the need for a better option, Congress passed the “Achieving a Better Life Experience Act” or “ABLE” in 2014.  The ABLE Act allowed states to establish “529A Plans,” which are similar to 529 plans for education savings.  In 2018, Oklahoma became one of 43 states to offer an ABLE plan, marketed as an Oklahoma STABLE account.  Don’t worry, if you live in one of the seven states which do not offer them yet, you can still open a plan in another state which allow out-of-state investors in their plan (Florida, Louisiana, Massachusetts, Michigan, New York, Tennessee, and Virginia).

529A plans work similarly to 529 plans, in that a third-party (such as a special needs child’s parent) can make cash contributions to the savings plan to provide for the future expenses of a disabled beneficiary.  Note that to be an eligible beneficiary of a 529A plan, you must be receiving SSI/SSDI for blindness or a disability that began before the age of 26.  Like 529 Plans, these funds can be invested and withdrawn tax-free when used for qualified disability expenses, including: education, housing, transportation, healthcare, assistive technology, employment needs and basic living expenses without disqualifying the beneficiary for Medicaid or SSI/SSDI.  A summary is provided in the table below:

529A Plan Benefits

  • Easier and cheaper to setup and administer than a Special Needs Trust
  • Tax-free (fed & state) investment growth inside the plan; whereas, SNTs are fully taxable at trust tax rates
  • Qualified distributions do not count towards taxable income for SSI/SSDI statutory resource limit
  • Broad definition of “qualified expenses” as any expense related to the designated beneficiary’s blindness or disability that assists him/her in increasing and/or maintaining their health, independence, and/or quality of life
  • If you live in Illinois, Iowa, Maryland, Michigan, Missouri, Montana, Nebraska, Ohio, Oregon, Pennsylvania, South Carolina, or Virginia--a state tax deduction is offered for contribution amounts

529A Plan Drawbacks

  • Limitations on annual cash contributions equal to annual gift tax exclusion amount ($15,000 for 2019)
  • Balances over $100,000 trigger suspension of SSI/SSDI benefits
  • Balance at beneficiary’s death MAY be subject to Medicare payback after outstanding bills and funeral expenses
  • Distributions for housing expenses may be a countable resource if retained beyond the month of receipt
  • No state tax deduction for contributions in Oklahoma (However, contributions to 529 plans have this benefit and 529 plans can be rolled INTO a 529A plan)
  • Limited to beneficiaries with blindness or disabilities which occurred before age 26

Despite the advantages over traditional SNTs, adoption and utilization of these plans has been slow; hence our highlight here.  If you or anyone you know might benefit from learning more about 529A Plans, I’d encourage you to visit the ABLE National Resource Center’s website or contact Radix Financial to help you walk through what option is right for your family.

As always, if you have comments or want to learn more about our services, feel free to reach out directly at amy@radixfinancial.com.

Have a great rest of the summer!


Amy Hubble, PhD, CFA, CFP®