18 Dec How can I best plan for a child with disabilities?

Q. I’m looking at the future for a child with disabilities who may need government benefits. Can a custodial account have a special needs trust as the beneficiary?
— Parent

A. We’re glad you’re planning ahead.

You have several options to plan for your child’s future.

“Transfers made to a custodial account, specifically under the New Jersey Uniform Transfers to Minors Act (UTMA), irrevocably vest the property in the minor child, notwithstanding the right to manage the property for the benefit of the minor, until he or she reaches age 21, is provided to the custodian, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

She said generally, the assets in such an account will not prevent a minor child with disabilities from receiving governmental benefits.

However, she said, if the assets are not spent down for the child’s benefit prior to the child reaching age 21, it is possible that assets remaining in the account may prevent qualification for certain benefits as an adult, Romania said.

Once a UTMA account has been funded, the funds cannot be merely transferred back to the parent or other source because the funds belong to the child, she said.

The custodian may transfer the funds to another custodian and they can also be transferred to a first-party — also called a self-settled — special needs trust, Romania said.

“The funds in this trust will be used to supplement government benefits the disabled child or adult will receive without disqualifying the recipient from the benefits because of the assets held by the trust,” she said. “Any assets remaining in the trust upon the beneficiary’s passing will be used to reimburse the government program — specifically Medicaid — for amounts paid before the balance is paid to the remaining beneficiaries of the trust.”

Instead of funding a UTMA account, a third-party special needs trust can be established with funds from a parent, grandparent or other people except the child, she said.

“These funds can be used to supplement any government assistance the child or adult later receives and will not have to be used to reimburse any government program upon the death of the disabled beneficiary,” she said. “Any funds remaining in the trust upon the disabled beneficiary’s death can be paid to any other beneficiaries named.”

Romania said another option is to fund an ABLE account — short for an Achieving a Better Life Experience account — provided the disability arose prior to the child reaching the age of 26.

ABLE accounts are tax-free savings accounts for individuals to cover “qualified disability-related expenses,” primarily education related, without impacting eligibility for governmental benefits, she said.

“Yearly contributions to the account are limited, as are total contributions to the account, which limits vary by state,” she said. “Although the account can be started or managed by a custodian, the funds in the account are considered owned by the child and similar to a first-party special needs trust, may be subject to repayment of government services upon the account owner’s death.”

Consider meeting with an attorney who has experience with special needs trusts and planning for people with disabilities to review all of your options.

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This story was originally published on Dec. 18, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.