The financial planning steps a family takes when their child turns 18 establish the foundation for the child’s support and well-being for the rest of the child’s life. If parents make the wrong decisions during this transition, the effects of those errors could affect the child far into the future, often when the parents are no longer there to care for the child. Therefore, parents must take extra care when planning for this crucial juncture.
Most special needs planning begins with a look into whether a child needs and qualifies for Supplemental Security Income (SSI) for support. SSI is a means-based program for people with disabilities and provides a limited monthly cash benefit of about $735 a month, the exact amount depending on the state and whether the beneficiary receives housing or income from other sources. In and of itself, this payment may or may not mean much for a child’s financial future (although for poorer families or individuals it may), but SSI eligibility also comes with a much more important benefit — access to Medicaid. For this reason alone many families, especially those with children who have major medical expenses, pursue SSI benefits despite the program’s severe income and asset limits. SSI can also be the ticket into vocational training and group housing services.
Once a child reaches age 18, they qualify for SSI based on their own income and assets. In order to receive benefits, the child must meet the government’s disability standard, have less than $2,000 in assets, and receive minimal income. Each dollar of unearned income (including any direct payments of cash to a beneficiary, along with additional reductions for in-kind payment for food and shelter) and every two dollars of earned income reduces a beneficiary’s base SSI award by one dollar. If the SSI benefit reaches zero because of this reduction, SSI coverage ends. Despite these restrictions, an SSI beneficiary needs only a $1 award in order to retain their Medicaid benefits, so careful planning in this realm carries great rewards.
A child who became disabled before reaching 22 years of age can also collect Social Security Disability Insurance (SSDI) based on a parent’s work record if either of their parents has worked enough quarters to collect Social Security and is already receiving Social Security benefits or has died. Under SSDI, the “adult disabled child” of the Social Security beneficiary receives a monthly benefit check, as long as they don’t perform substantial work, defined as earning more than $1,090 a month. After receiving SSDI for two years, the adult disabled child also begins to receive Medicare, a substantial benefit.
Often, adults who became disabled as children receive SSI benefits until their parents retire, at which point they transition to SSDI, which is usually preferred both because it may offer a higher monthly benefit and because the beneficiary no longer needs to be concerned about SSI’s strict rules on other sources of income and savings. On the other hand, the switch to SSDI can be problematic if it means that the adult child loses eligibility for Medicaid or other programs.
If a child has more than $2,000 in assets when they reach age 18, they are rendered ineligible for SSI. They may create a special trust, known as a “(d)(4)(A) ” or “first-party supplemental needs” trust to hold their savings. A (d)(4)(A) trust for a minor must be created by a parent, grandparent, guardian, or the court. Any assets held by the trust do not count against the $2,000 asset limit for SSI, allowing them to qualify. One requirement of such trusts is that when the beneficiary dies, any funds remaining in the trust must be used to reimburse the state for medical care the trust beneficiary received during their life. Because of this payback provision, planners often encourage trustees to pay for a child’s supplemental needs from a (d)(4)(A) trust before using other assets, in order to limit the state’s collection later on.
Finally, many families create trusts known as “third-party” supplemental needs trusts in addition to (d)(4)(A) trusts. As long as families fund these trusts with their own assets (never with their child’s funds) and give the trustee complete discretion to distribute the funds for a beneficiary’s care, the funds held in the trust will not count as the child’s assets. Furthermore, these trusts do not have to contain a payback provision, allowing families to place significant amounts of money into the trust without worrying that the government will receive a large portion later on. The trusts can then provide a child with special needs with services and care they may not receive from other sources throughout their life.
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