ABLE Accounts and Creating a Special Needs Trust in California
Special needs trusts are designed to allow families to create a detailed plan for their child’s future, while also making sure he or she remains eligible for social services as they get older. Here, we’ll discuss the hows and whys of creating a trust, and what to consider when naming a guardian and a trustee. We’ll also break down the available options for creating a special needs trust on a limited budget.
Let’s start by looking at the differences between a special needs trust and an ABLE account.
ABLE Accounts: Overview
The Achieving a Better Life Experience (ABLE) Act was passed by Congress in 2014 to allow people with disabilities to build savings accounts without affecting their eligibility for government services. Generally, money accrued in an ABLE account can only be used to pay for disability-related expenses, but what this means is fairly broad, and includes anything from housing, transportation, and daily living expenses to equipment, therapies, and education.
Not all states offer ABLE programs, and not all states’ ABLE programs are the same, but all ABLE accounts grow tax-free. As of January 2022, yearly contributions are capped at $16,000; however, those who choose not to participate in an eligible employer-sponsored retirement account can contribute an additional amount up to $12,880 (for Alaska and Hawaii residents, this figure is higher). In California, the ABLE program is called CalABLE. Unlike ABLE accounts in other states, where the maximum amount cannot exceed $100K, CalABLE accounts can grow up to $529,000. (Note that while Medi-Cal benefits are not affected by any amount of money held in an ABLE account, a balance over $100,000 will jeopardize an individual’s Supplemental Security Income and other government benefits.) Ideally, you’ll create both an ABLE account and a special needs trust, as they each offer different advantages.
Special Needs Trusts: Overview
There are three types of special needs trusts:
- third-party, which is administered and funded by anyone except for the person with disabilities it benefits;
- first-party, which can be set up and contributed to by the person with disabilities using their savings, inherited assets, etc.;
- pooled trust, which combines elements of both a third-party and first-party special needs trust, and is set up and administered by a nonprofit organization.
Special needs trusts are typically created in conjunction with a special needs attorney, which can cost anywhere from $2,000–$5,000 (you may consider asking the attorney you choose if they will consider setting up a payment plan). None of the lawyers that our staff consulted recommended setting up a special needs trust without the help of a lawyer — it’s a complicated document, and it’s easy to make mistakes. In addition, a special needs trust is just one piece of overall estate planning. (We’ve shared some recommendations at the end of this document toward that end.)
If you’re up for the considerable challenge, however, there are books and websites that can guide you through the process.
Third-party special needs trusts are typically set up and administered by a child’s parents. While they cannot be used to pay for “basic needs” like housing or food, as that would disrupt Social Security benefits, third-party special needs trusts have fewer rules governing how the funds can be spent, so long as it helps the trust’s beneficiary. There is also no limit on how much money you can deposit each year, which can be useful if you receive a settlement or inheritance and don’t want to worry about disbursing the funds in smaller yearly increments.
But the real advantage of a special needs trust is that it all but asks parents to create a very comprehensive plan for their child when they will no longer be their child’s primary caretaker(s).
Unlike first-party trusts, which are irrevocable and can’t be revised, third-party trusts can be altered. It’s a good idea to review the trust each year, particularly to update the letter of intent you’ll create that outlines your child’s ongoing needs and plan of care. Should any changes occur within your family structure, you may also need to reconsider who will serve as trustee, guardian, and/or make up the trust’s advisory committee. Finally, the advantage of a third-party trust for families raising young children with disabilities is that it leaves open the option of changing the structure of the trust once your child is older. For example, if your child may eventually be able to manage their finances on their own, you will want the flexibility of a revocable trust so that they can make that happen later on.
For more on special needs trusts, the Special Needs Alliance is a great resource.
The purpose of a special needs trust is to allow a person with disabilities to hold assets without affecting their eligibility for social services, but it is much more than that. When you create a special needs trust, you appoint a trustee or trustees to administer the trust when you’re no longer able; you nominate a guardian for your child; and you write a detailed letter of intent describing how you want your child to be cared for when you’re gone. These decisions are ultimately what make creating a special needs trust worthwhile, but they’re not easy. We’ll go into each of them below in more detail.
Choosing a Trustee
One of the most important — and difficult — decisions you’ll make when creating a special needs trust is deciding who will make care decisions for your child when you’re gone. We asked attorney Vanessa Terzian to walk us through the process and share some of the advice she gives families.
As parents, one or both of you will manage the trust for now; the trustee you nominate in your absence can be a family member, a friend, a corporation, or a trusted professional such as a licensed fiduciary, CPA, or attorney. You may consider naming one person to serve as both trustee and guardian, which is fine. In the likelier event you nominate one person to be a trustee and one to be a guardian, be sure to consider how effectively your chosen guardian would work with your chosen trustee, since their roles are necessarily interrelated.
Some characteristics you’ll want to look for in a trustee include:
- Be open, flexible, and communicate efficiently and courteously
- Be able to seek the guidance of professionals when necessary
- Be organized and stay organized
- Be responsive to the beneficiary’s needs.
To mitigate the risk families may feel in making such an important decision, Vanessa encourages us to name a trust adviser or committee of advisers to oversee the management of the trust. This adviser or committee of advisers is not involved in the daily maintenance of the trust, but rather can be thought of as the “voice of the trustor” — ensuring that the trustee is acting in the best interests of your child. Because a special needs trust is a private document and is not overseen by a court, it can be useful to have an adviser or committee of trusted family members or friends making sure your child’s best interests and various needs are being met. This advisory committee can also fire the trustee, should the need arise. For these reasons and more, it is important for families to write very detailed instructions to the trustee, along with a care plan for the beneficiary.
Choosing a Guardian
When it comes to choosing a guardian, Vanessa cautions families against nominating more than one person. If you nominate a couple, for instance, you run the risk of that couple no longer being together when it comes time for them to serve, in which case the guardianship would default to one or the other. The same kind of forward-thinking is necessary when considering far-flung family and friends; if the person you want to serve as a guardian lives overseas, it’s a good idea to name a local first responder until the permanent guardian is in place.
Finally, think carefully about who among your family and friends you trust and why, and what traits you appreciate in them that might make them the best guardian for your child. For example, if your older sister works in a medical field and understands the medical challenges your kiddo faces, she might be a great choice to serve as a guardian; on the other hand, she might make a better adviser if you feel your younger sister’s parenting style more closely matches your own. If your brother is less well versed in disability, or perhaps has no kids of his own, but is very good at organizing and understanding finances, he might make an excellent trustee.
Creating a Letter of Intent
While a letter of instructions or intent is not legally binding, it is the place to be very specific about goals, objectives, ideals — all of the things you want your child’s guardian to be considerate of and focus on.
Think of the letter of intent as the kind of detailed instructions you’d leave a caregiver if you were to leave your child in his or her care for a week. It should include everything from your child’s daily therapy and medication schedule to their favorite movies and how they like to spend their Saturdays. This letter will need to be updated each year as your child grows and his or her needs and schedule change.
Many attorneys will present you with a large three-ring binder containing all of the documents you’ve created together. You should consider adding all pertinent information about your child’s insurance, doctors, medications, therapists, and school records to this binder.
You can read more about what should go into your letter of intent, as well as an excerpt, here.
If investing in a third-party special needs trust isn’t currently an option for your family, or you don’t have a ready trustee you feel comfortable nominating, pooled trusts are a good option. Pooled trusts are set up and managed by a nonprofit organization that invests funds from many families. The nonprofit works with social workers, money managers, and attorneys who specialize in elder and special needs law. While some financial institutions won’t handle small special needs trusts and/or charge high fees, pooled trusts can be a lower-cost way for families to connect with highly skilled trustees.
We spoke with Michelle Wolf, founder and CEO of Jewish LA Special Needs Trust & Services (JLA), a nonprofit based in Los Angeles that offers pooled trust options to families.
Michelle likes to say that “a pooled trust is a special needs trust for the rest of us,” meaning that it’s an affordable way to have a professionally managed special needs trust. “A pooled trust combines the assets of many different beneficiaries, which results in lower cost of management and potentially higher rates of return,” she says. In addition, pooled trusts are often run by people who are familiar with laws, regulations, and issues pertaining to people with disabilities.
Not least, not every family will have the option of leaving their child’s future in the hands of a paid trustee or reliable family member. As Michelle puts it, “Most non-wealthy families will appoint another family member or sibling, but this can create conflicts of interest and tension. Quite often there is an assumption that a non-disabled sibling will take care of the disabled sibling once the parents or guardian can no longer care for them, but this often isn’t realistic.” A pooled trust can help alleviate some of the tensions that can arise from these situations.
JLA uses three different pots of money: third-party, first-party, and future-funded. “If you’re a middle-class family, you might want to create a future-funded trust, which refers to money from pensions, home sales, and life insurance that will come after the parents’ passing,” Michelle says. “At JLA, it costs $600 to set up a future-funded trust with the expectation that eventually it will have $20,000–$25,000. Professional trustees can charge up to $150 an hour and expect you to have at least $500,000 down the road.” First- and third-party trusts with JLA charge a $1,250 enrollment fee that covers the first 12 months of service. Learn more about JLA’s fees and financial examples here.
Both Special Needs Alliance and Special Needs Answers provide directories of available pooled trusts by state — Michelle reminds us to choose a trust based in the state where the beneficiary lives. Here in California, during the COVID-19 pandemic, JLA is working with families remotely to set up pooled trusts, and they work directly with the financial institutions, so there’s no need to venture out. Michelle recommends starting the process by creating an estate plan if you haven’t already, or creating a future-funded trust and then taking it to an attorney to work into your overall estate plan.
The fine print
As mentioned above, it’s important to find out exactly how much the pooled trust charges before joining, as there is often a one-time enrollment fee plus an annual fee. Some pooled trusts distribute funds at certain times of the month, which could be problematic if the beneficiary needs their funds more frequently. Another thing to keep in mind is that it can be difficult to move investment portfolios once you’ve joined a pooled trust, and many won’t allow real estate or other nontraditional investments.
Monika Jones, an attorney who founded The Brain Recovery Project to initiate and fund research on hemispherectomy and childhood drug-resistant epilepsy, cautions that both first-party and pooled trusts often contain a payback provision: if the beneficiary passes away, any remaining money in the trust can be used by the government to cover any Medicaid expenses that were incurred. A properly designed third-party trust does not require a payback provision, meaning that the government has no right to the funds when the beneficiary passes away.
When considering a pooled trust, compare programs carefully and set up a meeting with a program representative to discuss these and other potential concerns.
Choosing a Life Insurance Plan
We reached out to Marc Shulman, founder and president of the National Center on Life Planning, which guides families with special needs trusts and conservatorships and provides support for life and estate planning. While the cost of a life insurance plan will differ based on many factors, including age and health conditions, Marc says he always recommends permanent life insurance plans instead of termed plans. His organization conducts in-depth interviews with families to discover the assets they might already have and help them make a plan.
JLA refers families to financial advisers to help them make these decisions; another option is to go through an insurance broker. Before you do, you might consider using an online life insurance calculator to help you think through your options and determine what life insurance amount you’ll need based on income, age, and other important factors.
These are not small decisions, and it’s important to remember that planning for your child’s future doesn’t have to happen all at once. You can make changes to whatever you decide at any point in the process. You can open an ABLE account that you and family members can fund a little bit at a time, and prepare a simple will on your own that includes a letter of intent to help lay the groundwork for a trust, whether pooled or third-party. Similarly, if you choose a low-cost life insurance plan now, you can upgrade it later. Whichever path you choose, you’ll have peace of mind in knowing you’ve begun the process of planning for your child’s future to ensure they can get the quality of life, love, and support they deserve.