Strategies to Support Your Loved One’s Education
Planning to pay for a loved one’s educational expenses can be a daunting task for anyone, and parents of children with special needs face additional challenges. Fortunately, there are several planning strategies that can help you plan for your family member’s education without jeopardizing their eligibility for government benefits.
Individualized education plan (IEP)
The first step in supporting the education of your loved one with special needs is to establish an individualized education plan (IEP). This is a document that details the special education instruction, support and services your child needs to be successful in school.
IEPs are covered under the Individuals with Disabilities Education Act (IDEA), a federal law that requires all special education students to have access to a free and appropriate public education. This law also mandates that teachers be appropriately trained and have the skills necessary to serve children with disabilities.
IEPs are established in collaboration with a child’s school administration, teacher(s) and parent/guardian. The document outlines the specific education needs of the student and the services required of the school to meet those needs. IEPs are typically reviewed and updated annually.
Special needs trust (SNT)
One way to pay for educational expenses for your loved one with special needs is by establishing a special needs trust (SNT). This is a trust that holds money for a beneficiary who has a disability or chronic illness. SNTs are intended to supplement government benefits, such as SSI and Medicaid, while preserving the individual’s eligibility for these benefits.
Another advantage of SNTs is that they can help ensure assets are distributed appropriately, as directed by the trust documents. Family and friends can make gifts to an SNT of up to $18,000 per year, per donor ($36,000 per married couple) without being subject to gift tax.
SNTs also offer flexibility in the types of assets used to fund them, including cash, securities and life insurance proceeds. In fact, a common strategy is for parents to purchase a second-to-die life insurance policy, which pays a death benefit to the SNT after the last surviving policy holder passes away.
SNTs can even help protect your loved one with special needs from falling victim to financial predators, as assets can’t be accessed without the trustee’s approval.
While there are immense benefits to establishing an SNT for your loved one, there are also some downsides. First, the person you designate as trustee will have complete discretion over how the trust’s assets are distributed to your loved one. This can cause some issues if the trustee doesn’t share your intentions or have the same financial priorities as your loved one, which is why it’s important to carefully consider whom you designate as the trustee.
Also, in order to ensure your trust is structured properly, you’ll need to work with an estate planning attorney, which costs money. However, this investment is typically well worth the added expense, considering the peace of mind it provides to both you and your loved one.
Finally, there are ongoing costs and responsibilities to administer and maintain the trust, which is another reason it’s important to select a willing and capable trustee.
ABLE account
Named after the Achieving a Better Life Experience Act of 2014, ABLE accounts offer another opportunity to provide additional benefits to individuals with special needs. Similar to SNTs, the assets held within an ABLE account don’t interfere with benefits eligibility (so long as they don’t exceed $100,000), and contributions can be made by the account holder as well as friends and family members who wish to support the individual with special needs.
When used to pay for educational expenses, withdrawals from ABLE accounts are exempt from taxes. In contrast to SNTs, which are managed by a trustee, ABLE accounts are owned and managed by the individual with special needs. It’s also much easier to access ABLE account assets than SNT assets. ABLE accounts can even be linked to a debit card for streamlined spending.
Another benefit of ABLE accounts is that the assets can be used for a wide range of purposes, including anything that helps improve the individual with special needs’ health or quality of life. This includes basic living expenses as well as food, employment, education, transportation, etc.
In order to qualify for an ABLE account, an individual with special needs must meet one of the following requirements:
- Qualify for Supplemental Security Income (SSI) by a disability that occurred before age 26
- Qualify for disability insurance benefits, childhood disability benefits or disabled widow/widower benefits by a disability that occurred before age 26
- Hold a certificate that proves the disability occurred before age 26
Once an individual qualifies, it’s easy to establish an ABLE account through the state’s website. No attorney is needed.
However, it’s important to be aware that ABLE accounts have contribution limits. In 2024, contributions are limited to $18,000 per year.
Another downside is that any assets left in an ABLE account after the account holder’s death may be used to reimburse the state Medicaid agency for any services paid by Medicaid.
SNTs vs. ABLE accounts
Both SNTs and ABLE accounts can provide money to support education funding for an individual with special needs without jeopardizing their eligibility for public benefits. However, these two vehicles operate in different ways. Following is a side-by-side comparison to help you determine which strategy is right for you.
Could you use help planning for the education of your loved one with special needs? Creative Planning is here for you. Our teams of wealth managers and attorneys are committed to caring for all aspects of our clients’ financial lives, including special needs planning for family members. To get started, schedule a call with a member of our team.
