A Disability Finance Ladder for Parents

Parents of disabled kids have a bunch of tools: special needs trusts, their own retirement investments and savings, and ABLE accounts as well as programs for the future: SSI, Medicaid. and SNAP – and somehow supposed to build a financial strategy to last conceivably decades past the end of their own lives.

It’s kind of like being handled a saw and a 2 x 4 and being told “Go build a house“

Of course, in our case, we really don’t have a lot of choice. What follows is how I’m thinking through this for our family. As always, I’m not a lawyer or accountant or financial planner… and you may need all three!

Your mileage may be a lot, and I would really appreciate your your comments and suggestions based on your experiences… let me know.

!! I’ll try to put together something similar for disabled adults… but that will be more speculative – if you’ve got any helpful experiences, strategies, or suggestions – send me a note!

Step 1 – Maximize your own financial savings and security

If you can’t get yourself for the rest of your own life on a solid financial foundation… are going to be hard pressed to help your disabled child on their journey through their life.

Your 401(k)s, IRAs. Roth IRAs, and pensions… fund them all to the max.

The one variable here might be a bias away from things like pensions and annuities as they usually can’t be passed on to your heirs.

Step 2 – Individual Investments – Stocks, real estate, and such

You might expect that the next step is in disability financial planning would be a special needs trust or ABLE account.

If you are a prudent investor (buying and holding stocks or long-term real estate), you likely aren’t going to face much in the way of taxes until you sell them… and if you hold these assets until you die, they would transfer to your heirs (or their special needs trust(s)) at their stepped-up basis and thus, they wouldn’t be hit with taxes either.

(This assumes you are handling any of these investments in a tax-efficient manner of course.

BUT, if you think you are going to be an active stock trader (or subject to selling when things get tough) or a real estate flipper… move on down to ABLE accounts below.

Step 3 – Add an ABLE account (if you can… at some point)

I have complicated thoughts on ABLE accounts, but they are a good “next step” financial tool.

If your disabled child is eligible for an ABLE account and you’ve already fully funded your own savings and made prudent investments, ABLE accounts are a smart next step.

They are also a good tool for forced savings or for gifts from other family members or others who may want to help support your disabled child.

ABLE accounts are easy to set up. The question is – which state and how much do you put in.

Annual maintenance fees, investment returns, and projected impact on eligibility for disability services are important considerations if you are looking at the ABLE account.

For example, If you anticipate your child being eligible for and using SSI, there is no point in there being more than $100,000 in the account and so you may wind up putting only a modest amount of money in this account if you’ve got enough time for it to grow to $100,000 before they need to access the funds.

The other reason to set up an ABLE account is as a pass-through for “Qualified Disability Expenses” to shelter income from savings and investments (currently maxed out at $19,000 in new contributions per year) against being considered as income and resources and thus hurting eligibility for disability services.

NOTE – ABLE accounts are currently considered a “first party” account and therefore may be subject to Medicaid Estate Recovery (Clawback).

Step 4 – Special needs trusts – Housing and “Laundry”

Special needs trust solve two problems. But by far the most important one is a allow you to put housing for disabled person and protect it from being considered an asset or resource for eligibility for dis disability services (especially through a third party special needs trust… NOTE – this is serious lawyer and accountant territory… do your homework!).

This is very important as obviously housing is a major cost for most people

An adult disabled person living in their parent’s house would be expected to pay rent or the housing would be considered a gifted resource and thus count against they’re eligibility for services and supports.

Even though owning a house doesn’t technically count as an asset (up to a point) for government services, paying for insurance, property taxes, and maintenance can all be considered “resources”… (I don’t know about you, but my experiences with home ownership is that all of these add up to a lot of money!)…. so sheltering a home in a special needs trust still seems like a good idea.

The other directly beneficial tool for a special needs trust is to act as a pass-through for non- critical expenses.

Other assets can Be kept in your special needs trust, but there is no particular advantage for them to do so.

NOTE – I should mention again I am not a lawyer or accountant so do your own homework, please!

As I’ve written before, because of this pass through feature , it would be really nice to have an easily set up. low-cost special needs trust through a bank or a brokerage.

If you’re interested let me know. I may put together early sign-up list if we get enough people either get someone else to do it or we can set up on ourselves

It is OK to have multiple special needs trust so if you wanted to set up one for disbursement of assets, And a separate one for holding a house.

Another advantage of a smaller special needs trust or disbursing assets would be that it could be kept as a first party, trust and give the disabled person more control and autonomy by giving them control over those assets

A final very important note for specialty needs trust is that is set up properly. Funds can pass from the special needs trust into an ABLE account up to the annual ABLE account limit therefore, if you have substantial assets, especially and trust up to us of 2025 – $19,000 a year can be diverted into the account.

Step 5 (or 1 or 2 or …maybe?) – The Disability Housing Dilemma

You can argue whether this is the first or second step on the ladder or here at the end. As I’ve written previously about disability house hacking. It is possible to strategically use your primary residence as a way to build towards solving the disability housing problem by transforming a starter home into disability housing. You could also do the same thing with multi-family housing Which may have the advantage of being able to fund itself in terms of property taxes insurance and maintenance and maybe even provide an income stream.

If you didn’t get in on this tactic years ago, no problem. If you are an established homeowner, when you sell your existing home and you can use the proceeds to potentially buy a more suitable property such as a multifamily property or move to a lower cost area where your equity can be converted into a more sustainable housing setup.

I’m not sure about this… but it is intriguing – Another potential option might be while you’re living in the house. If you only have a one child who happens to be disabled it to actually transfer the house itself that you’re living in into your special needs. Trust your child special needs trust and then housing doesn’t count against your child’s resources and you can effectively pay rent to your own child. This is getting clever and tricky. Definitely talk to a lawyer. Or an accountant or both

Step 6 or Step Zero – Location, Location, Location

That is the well-known mantra of everyone who invests in real estate and it should be a critical consideration for disability financial planning.

Different jurisdictions, at least in the United States, have vastly different structures for their disability services and how they handle rules for assets and resources and such. For example here in California I believe a house of up to $130,000 in value may not count as a resource for Medicaid, But our other asset and resource limits are notably lower than other states on the order of thousands of dollars a month.

If you move outside the United States, typical health insurance may be radically more affordable and so you might be able to handle it out of pocket rather than dealing with all the brutal constraints of Medicaid and similarly your cost-of-living could be substantially different.

A huge and complicated topic. I’m just beginning to explore it. You can follow along in this newsletter or check out what I’ve put together already in the category Disability Nomad.