Make Your Money Safe Again – MYMSA for Disability Financial Planning
How do you make your money safe for a disabled person is the basic financial question you need to ask and answer.
… and what does “safe” mean?
Protecting Benefits & Income & Assets – Oh My!
We start with the basic framework of the US (and seemingly other nation’s) disability systems… that Disability Services are a Benefits Program, not an Insurance Program, and so have a means-testing component. In short they are
Poverty by Design
To access many of these programs, you must be poor, and in some cases extremely poor (Yes, this is a serious problem that we need to talk about)… but, here we are today.
HEADS UP – I’m not a lawyer or accountant! I’ve been reading up on all of these crazy things for the benefit of my son and my understanding of the crazy, crazy US disability benefits system for you, my readers… DO NOT TAKE ANYTHING I SAY AS “OFFICIAL” ADVICE. This is my personal best understanding of things, I may be way wrong… I’ll update this and you as I learn more.
Protecting Income
In general, if you have to declare income on your tax return, it is going to affect your eligibility for services. Salary, stock dividends, lottery winnings – if you should report it to the IRS, it is likely to be counted as income.
There are 3 protected “funnels” for distributing funds that don’t count (even if they are in your name):
- ABLE Accounts
- Special Needs Trusts
- Pooled Trusts
Funnels?
The reason I call these funnels, is that funds don’t necessarily need to come from these channels, only that they need to go THROUGH these channels to reach the disabled beneficiary. Thus, someone could gift money to your special needs trust or you could have another trust or business that makes a distribution to the special needs trust or ABLE account… but the source of the funds needs to NOT be the disabled beneficiary.
WHY DOES THIS MATTER? If a disabled person or their employer puts money into an ABLE account through the ABLE at Work program, that is still going to count as income even though subsequent earnings that are generated by the ABLE account… don’t count as “income”…. this restriction raises serious questions about how useful the ABLE at Work program is from my perspective…. or am I missing something?
PAINFUL NOTE: The number that matters is your GROSS income, not the net that winds up in your pocket…. OUCH!
This is why I THINK that an employer could safely make a direct contribution to fund a pension for the benefit of a disabled person AS LONG AS IT IS NOT REPORTED ON YOUR W2… basically as a fringe benefit… but… I’m not a lawyer or accountant. Optimally, this would be set up to contribute to a Special Needs Trust (or maybe the employer could self-manage a Pooled Trust?).
It does appear that neither distributions from Special Needs Trusts or ABLE Accounts affect Adult Disabled Child benefits.
No food, no rent, but a house?
Special Needs Trusts can’t pay for the basics of living – food, rent, or anything covered by a government benefit… but (if they are a third party trust)… they can own your house (and many other things)…. they can also pass funds to an ABLE account which CAN be used for basics of living (if they are set up to do so…)… it kind of feels like we are in the world of money laundering, doesn’t it… …which leads us into the world of assets…
Protecting your ASSets
So far, ABLE accounts can only hold funds you put into them (new deposits currently limited to $19k a year and you can have only one ABLE account), but Special Needs Trusts can hold anything and any amount of assets can be loaded into them.
First Party Trusts and Third Party Trusts
First Party Trusts are owned by an individual and third party trusts are held for the benefit of an individual. The distinction here is to make sure assets don’t ever “touch” the beneficiary directly…. if they do, they’ve got kooties and can imperil your eligibility for services (MUST STAY POOR!).
ABLE Accounts are currently first party trusts (like your IRA or 401k retirement plan, technically) and so would affect your eligibility for disability services, except that they have limited exceptions ($100k doesn’t count against SSI assets and $250k doesn’t count against against Medicaid assets).
!!!! This has the somewhat bizarre effect of meaning that those who the government deems having the highest need (both SSI and Medicaid) have the greatest restrictions on the utility of ABLE accounts.!!!!
This could be most easily fixed by turning ABLE accounts into 3rd party trusts unless requested by the beneficiary.
… or just exempting them from affecting disability service eligibility and other program benefits entirely.
Other Trusts and such
… hey, while you are spinning up trusts and keeping lawyers fully employed (congratulations!), you can have other assets in other locations just so long as the disabled individual is a beneficiary and not an owner of the asset…. you just have to make distributions via one of the “safe funnels” above.
Thus, you could set up a single trust for the benefit of your several children… and have it pass assets onto to a special needs trust as needed for distributions or whatever.
SOMETHING TO CONSIDER – I don’t know why all trusts for the benefit of children aren’t set up as Third Party Special Needs Trusts as a default. A lot of qualifying disabilities may not be recognized at the time the trust is set up and re-configuring a trust into a Special Needs Trust is an expensive PITA (personal painful experience here). There is no “cost” later… if the special-needs-trust-ness isn’t needed, no problem… and it should be pretty straightforward to set a trust up as a SNT to start with.
Medicaid Estate Recovery – Medicaid Claw-back
Damn, this is evil. The US may attempt to recover benefits that they’ve paid out under Medicaid after the person dies. They “generously” won’t go after assets held jointly with a spouse or that have been inherited by a child (maybe?). This is another area where first party assets are vulnerable, but not those held by a third party. This is another reason you may want to consider using an ABLE account more as a “funnel” to pass through funds as needed rather than as an investment vehicle.
ON THE OTHER HAND... this may only matter if you have sufficient assets in the ABLE account to be of concern at the time of the death of the disabled beneficiary… hopefully a long, long time in the future!
