All parents worry about their children’s future. But if you are a parent of an adult child with special needs, planning for the future takes on greater urgency. You’re providing not just for one generation but two—including your own retirement and your adult child’s needs after you are gone. 

“The uncertainty is so intense,” says John Nadworny, a financial planner with Shepherd Financial Partners in Wincester, Mass.

With a 28-year-old son with Down’s Syndrome, Nadworny understands firsthand what it’s like to plan for unknowns. Where will your adult disabled child live? How much can you rely on government benefits? What will your loved one’s health needs be?

“You may have to think about planning for 50 years of care.”
Financial planner John Nadworny

“You may have to think about planning for 50 years of care,” says Nadworny, co-author with Cynthia Haddad of The Special Needs Planning Guide. “You can’t process that easily.”

Still, he and other experts stress that you can devise a successful plan, but you’ll need take into account not only ways to save but also how to protect those funds so that your loved one continues to receive critical government benefits, including Medicaid and Supplemental Social Security (SSI).

“If you were to forego government benefits, you’re looking at a lifetime cost of $1 million to $2 million,” says Todd Sensing, a financial planner with FamilyVest in Destin, Fla. and a father of two sons with autism.

Set up legal protections

The most important tool to protect savings is a special needs trust (SNT), which can be used pay for most expenses other than food and housing without disqualifying your loved one from government assistance programs. Assets within the trust are shielded from creditors and are overseen by one or more trustees—often a family member and a professional serving as co-trustees.

There are two types of SNTs—first-party and third-party trusts. With a first-party trust, there is a payback provision, meaning that when the beneficiary dies, any remaining funds will be used to repay the state for Medicaid benefits.

“We use first-party trusts when there is a legal settlement in the name of the child or an outright inheritance named to the individual,” says Haddad, who also works with Shepherd Financial Partners.

When the assets are owned by the parent, however, planners recommend a third-party SNT. With these trusts, any money remaining after the beneficiary dies can go to other family members. 

Setting up a trust can be expensive—ranging from $2,000 to $5,000. If you don’t have many assets to fund the trust or there is no family member who can act as a trustee or a co-trustee, consider using a pooled trust. These trusts are established and run by nonprofit organizations, with individuals holding sub-accounts with minimum deposits as low as $5,000.

“Traditional trust companies have minimums of typically $500,000,” points out Barbara Helm, president of the National PLAN Alliance, a nonprofit umbrella organization for pooled trusts in 22 states. More important, pooled trusts serve only special needs beneficiaries, and the trustees keep close tabs on any changes in rules affecting government benefits.

“A special needs trustee pays bills that won’t reduce benefits, and we make all payments third-party vendor payments so that it won’t look like income to the beneficiary,” she adds.

Use an ABLE account

Another important tool to use with a trust is an ABLE account – named for the Achieving a Better Life Experience Act of 2014. These accounts, which are similar to 529 plans and run by states, allow a person with a disability that started before age 26 to save more than the $2,000 maximum allowed to continue receiving SSI benefits.

Parents and their disabled adult children who are working can contribute up to $15,000 annually. The money grows tax-free and there are no taxes on distributions. To compare ABLE accounts, visit the ABLE National Resource Center.

With a Roth, you can take money out tax-free at age 59 and a half to pay for expenses like transportation and entertainment for your child.

A huge advantage to ABLE accounts is that, unlike with an SNT, you can use the money to pay for food and housing without affecting your SSI, points out Janet Lowder, a Cleveland attorney who focuses on special needs. “Let’s say the child is living in a condo that costs $1,200 a month,” says Lowder.

The SSI maximum benefit is $771 for an individual, but the parents can transfer the difference from the trust to the ABLE account to cover the remaining housing costs. “If the parent or trust were to pay a portion of it directly, the child would lose one-third of their SSI,” she says.

If you save more than $100,000 in an ABLE account, it could put your government benefits at risk. These accounts also have a payback provision, so it makes sense to spend funds down and then replenish the account from a SNT.

Finding the funds

Of course, a trust is only as good as the funds inside it. But parents should first focus on their retirement. “If you do a good job of that, there will be money left over to provide for the child,” says Sensing.

Nadworny urges parents to fund Roth IRAs before ABLE accounts, especially if the parent is not financially secure. “A fundamental principle is not to lose control over the money for the child,” he says. With a Roth, you can take money out tax-free at age 59 and a half to pay for expenses like transportation and entertainment for your child.

Of course, parents can save as much as possible and still not be in a position to provide for a disabled adult child for 50 years. For most families, permanent life insurance plays an important role in funding a trust. Money from a second-to-die policy, for instance, can go directly to a special needs trust after both parents have died without passing through probate.