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Disability in estate planning

Planning ahead for special needs

For families of loved ones with special needs, ensuring the day-to-day needs of their child, spouse or sibling are met has been their life’s work. But they often don’t plan for how the academic, emotional, financial and physical support they provide will continue after they, the primary caregivers, are gone.

There are unique challenges that a disability brings to the estate planning process. Consulting with an attorney familiar with special needs trusts and disability benefits will help ensure that clients have done everything possible to provide for their child with disabilities while protecting eligibility.

Concerns and issues

A person with a physical or cognitive disability may qualify for taxpayer-sponsored public benefits or privately funded benefits to support their living expenses, since they may be unable to work or gain full employment due to a disability. These public benefits are means tested, meaning that to apply (or re-apply) for them is a drawn-out process.

Families that plan on leaving an inheritance to loved ones with special needs should be aware that such gifts could jeopardize other vital benefits that the individual receives. Leaving money, retirement accounts or other assets directly could disqualify the beneficiary from receiving government benefits.

Planning for individuals with disabilities

The time your clients take to carefully plan with a qualified estate planning attorney who is familiar with special needs trusts and disability benefits can improve their disabled child’s life and bring them peace of mind.

When engaging this market, it is extremely important that you network, build and maintain relationships with your Centers of Influence, including estate planning attorneys, CPAs and other professionals that work with special needs families. Once you decide to enter this market, use our resources to engage new clients.

Strategies and solutions

Special needs trusts

A special needs trust is a popular strategy for those who want to help someone in need without the risk of the person losing their eligibility for programs that require their income or assets to remain below a certain limit. A special needs trust is designed to help cover a person’s financial needs that are not covered by public assistance payments. The assets held in the trust do not count to qualify for public assistance. Special needs trusts are an option open to parents, grandparents, friends or anyone wishing to leave an inheritance or other assistance to care for someone with physical or cognitive disabilities.

Typically, this type of trust is an irrevocable trust. That means it cannot be modified, amended, or terminated without permission from the grantor’s beneficiaries. The assets in a special needs trust can’t be seized by creditors or by someone who wins a lawsuit.

ABLE Accounts

The 529A ABLE (Achieving a Better Life Experience) Savings Plan was created in 2014 to help families of disabled children save for disability expenses, including education, job training, healthcare and financial management, to supplement private insurance and public benefits. Like 529 college savings accounts, these savings accounts have similar tax advantages.

Pooled trusts

For a smaller inheritance or for families who don’t have a reliable trustee candidate, a pooled special needs trust might be a good option. This is often a cost-effective solution because the funds of many beneficiaries are combined into one trust for administrative and investment purposes. Sub-accounts are created for each beneficiary, with the disabled person’s account receiving a proportionate share of the entire fund’s earnings. A nonprofit organization manages pooled trusts, but fees, services and contracts vary.

Purchasing exempt resources

Purchasing exempt resources, such as an automobile or residence, can be an effective strategy for some people, particularly when combined with a pooled trust or ABLE account.

Now that you have collected the necessary information, you can design the appropriate financial strategy to fit your clients’ needs.

The ABLE Act is a tax-advantaged savings account designed for individuals to help pay for qualified disability expenses. Participation in a ABLE Account does not guarantee that the contributions and investment returns will be adequate to cover all expenses related to the designated beneficiary as a result of living with disabilities. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-qualified disability withdrawals.

Each state's ABLE program will have different investment choices, costs and fee structures. You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact the state specific plan Program Administrator to learn more about the benefits that might be available to you by investing in the an ABEL Account. Not all states have an ABLE program.

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Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.

Life insurance products contain charges, such as Cost of Insurance Charge, Cash Extra Charge, and Additional Agreements Charge (which we refer to as mortality charges), and Premium Charge, Monthly Policy Charge, Policy Issue Charge, Transaction Charge, Index Segment Charge, and Surrender Charge (which we refer to as expense charges). These charges may increase over time, and may contain restrictions, such as surrender periods. Policyholders could lose money in these products.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

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DOFU 12-2022