Caring for a dependent with special needs comes with many challenges, and preparing for their financial future requires careful planning. Fortunately, programs such as Supplemental Security Income (SSI) and Medicaid provide a base level of support. Additional income or assets may help provide a more secure financial future. However, to maintain these government benefits, the dependent must meet strict eligibility requirements. Balancing the two requires careful planning.
Understanding SSI and Medicaid Eligibility
Supplemental Security Income (SSI) provides monthly payments to individuals with disabilities. To qualify, the dependent must meet strict income and asset limits. In some cases, parental resources are included in the calculation.
Medicaid helps cover the healthcare and long-term care expenses often needed by dependents with special needs. Since eligibility for Medicaid is regularly tied to SSI, exceeding SSI’s asset limits may put both benefits at risk.
The Role of Special Needs Trusts
A special needs trust holds and manages funds for dependents with special needs, allowing them to access financial assets without exceeding SSI’s limits.
There are three main types of special needs trusts:
- First-party trusts: Funded with the dependent’s own assets, such as an inheritance or legal settlement.
- Third-party trusts: Established by parents or family members and funded through savings, life insurance, or other assets.
- Pooled trusts: Managed by nonprofit organizations, combining resources from multiple families while keeping individual accounts separate.
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Setting Up and Funding Special Needs Trusts
There are several approaches to consider when funding a special needs trust for federal employees. Here’s a look at some of the most common options.
Federal Life Insurance Benefits
Feds frequently use their Federal Employees’ Group Life Insurance (FEGLI) as a funding source. It provides flexible options for coverage amounts, making it easier to customize a policy to meet the future needs of a dependent.
Designating the trust as the beneficiary, rather than the dependent themselves, can help ensure the funds are directed appropriately and avoid unintentionally exceeding SSI limits.
Thrift Savings Plans (TSPs)
Feds may also consider directing a portion of their TSP to a trust for their special needs dependent. However, it’s important to understand the potential tax implications and ensure the trust is structured to accept retirement assets without jeopardizing the dependent's eligibility for government benefits.
Federal Employees Retirement System (FERS) Survivor Benefits
Under FERS, federal employees can elect survivor benefits for a dependent, including a child with special needs. These benefits provide a portion of the employee's annuity after their death, offering ongoing financial support.
To preserve the dependent's government benefits, it’s critical to name the special needs trust as the beneficiary, rather than the dependent directly. Also, keep in mind that FERS offers several levels of survivor benefits, such as 25% or 50% of the annuity. It’s essential to select an option that provides enough income to fund the trust without overfunding it, which could jeopardize eligibility.
Get Expert Advice for Special Needs Planning
There are many critical factors to consider when using federal benefits for special needs planning. An experienced attorney should draft the trust to ensure there are no unexpected tax or eligibility implications. Also, consider consulting with a CERTIFIED FINANCIAL PLANNER™ practitioner with expertise in federal benefits and special needs planning. They can help you manage the complexities and integrate it into your long-term financial plan.
For personalized advice regarding your family’s special needs planning, reach out to the team at Serving Those Who Serve at [email protected].
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
