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Family Finances

How To Invest When You Have Family Members With Disabilities

Having family members with disabilities requires lifelong planning that might not be easily addressed by typical financial planning advice. Planning appropriately for their lives can ensure they are protected and secure.

Articles by andrewwestlin

By Andrew Westlin
Financial Planning Professional, Betterment  |  Published: May 31, 2019

A family member with disabilities may have many different "goals" that you are trying to take care of (immediate medical expenses, long-term care, etc.), so you should bucket your investments appropriately.

Special Needs Trusts can be an effective way to provide for a loved one with disabilities while still allowing them to receive certain government benefits.

Understand the different roles each individual plays and the types of Special Needs Trusts that are available.

Automate your investing so that you can have time to focus more on other priorities and loved ones.

If you have children or other family members with disabilities, one of your most precious financial priorities may be providing security for your loved ones. As a caretaker, you may be able to provide attention and financial stability during your lifetime but there are a different set of challenges to overcome if you are to pass away.

Special Needs Trusts are an extremely beneficial tool that can ensure that your family member will be taken care of and provide you with peace of mind.

What Is A Trust Account?

Generally speaking, a trust allows an individual – otherwise known as the grantor – to provide specific guidelines on how funds that are placed in a trust can be used. Essentially, a trust allows the grantor to have more control over what happens to their assets after they pass on, while also providing unique estate and tax planning benefits.

Along with the grantor, there are two other major players involved with the creation of a trust:

  1. A trustee, who is an individual or group of individuals charged with the responsibility of adhering to the rules outlined in the trust documents by the grantor.
  2. A beneficiary, who is the person or person(s) that are entitled to the trust’s assets.

In most circumstances, the grantor, trustee, and beneficiary are different people; in some cases one person can play multiple of these roles. There are two broad categories of trusts: revocable (able to be changed) or irrevocable (not able to be changed and considered to be a final gift).

Special Needs Trusts Benefits

Special Needs Trusts provide three specific advantages for a beneficiary with disabilities.

First and foremost, the creation of the trust allows you to set aside funds in a specific vehicle that is intended to support your beneficiary with disabilities.

Additionally, you have the luxury to hand-select the trustee who will manage finances accordingly when your beneficiary otherwise may not be fit to manage this on their own.

Finally, by having assets placed in a Special Needs Trust, you can ensure that government benefits, such as healthcare coverage, Supplemental Security Income (SSI), rent subsidies, and job assistance, will still be available for your loved one.

Many of these public programs have financial limitations that could prevent someone with disabilities from receiving benefits. For example, someone may be eligible for SSI, but if they have assets in their name of over just $2,000, SSI is not available.

A Special Needs Trust can shield those assets and keep your beneficiary eligible to receive SSI. These types of government benefits can be extremely valuable for someone with a disability to help make sure they have an income stream and a place to live after you have passed.

To be effective, a Special Needs Trust should be irrevocable, otherwise these benefits may be at risk.

Types of Special Needs Trusts

There are three types of Special Needs Trusts:

First Party

The assets in a first party Special Needs Trust rightfully belong to the person with disabilities. Commonly, this pertains to inherited assets, settlements, or windfalls – even their own personal savings. As long as these funds are held within the Special Needs Trust, the beneficiary can still qualify for government benefits.

During the beneficiary’s lifetime, funds in the trust can be used to pay for the needs not covered by government program support.

When the beneficiary passes away, any remaining funds must be paid back to the government, up to the amount of Medicaid care that the beneficiary had received during their lifetime.

Third Party

A third party Special Needs Trust can be established by any parent or family member of someone with disabilities. The grantor gifts their own assets into the trust, such as bank or investment accounts, that can be used during the beneficiary’s lifetime to cover their needs.

Like the first party trust, the third-party trust doesn’t negatively impact the beneficiaries ability to receive government benefits.

However, unused funds at the end of the beneficiaries lifetime do not have to be paid back to the government. This allows grantors to ensure that their beneficiary with disabilities is taken care of first, but then funds can be left to other family members after.

Pooled

In first and third party Special Needs Trusts, you must appoint a trustee(s). If you don’t know an individual that you are confident can act responsibly as a trustee, a pooled trust allows you to name a charity as manager.

Funds for multiple beneficiaries are pooled together for investment purposes, but each beneficiary has their own respective account. At the end of the beneficiary’s life, there is a payback clause to the government for Medicaid benefits, and the charity will also receive payment for managing the trust.

Managing A Special Needs Trust At Betterment

Trustees have a long list of responsibilities, including a fiduciary responsibility to make sure the trust’s assets are in a sound investment plan with the right risk profile that meets the needs of the beneficiaries.

Betterment trust accounts can be ideal for trustees who seek a professionally managed portfolio with a hands-off approach. Betterment will provide automated fiduciary advice that includes risk recommendations, a diversified investment portfolio, automated rebalancing, tax-efficiency, and low fees.

As trustee, you can create multiple goals for an individual trust, allowing you to customize investment needs for each financial objective. For example, this means that you can invest funds for short-term and long-term needs at varying risk levels. Additionally, our platform allows you to manage multiple trusts at once, and you can access them all from one single login.

While Betterment can help trustees invest trust assets appropriately, we are not able to help in the creation of a new trust. If you are considering establishing a Special Needs Trust, we recommend seeking the guidance of an estate attorney.

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