529 and UTMA accounts for individuals with special needs
Keeping up with Social Security rules and regulations can be a riddle wrapped in an enigma shrouded in mystery. The worst situation is when you get conflicting advice from two people and then a third opinion from your local Social Security office. Its important to give truthful facts when dealing with your local Social Security office and report all income and assets. A tricky situation is often presented when dealing with UTMA (Uniform Transfers to Minors Act) accounts and 529 Plans and disability. A typical situation regarding these assets looks like this:
Tom is 18 and has downs syndrome. His grandfather set up a UTMA account for him when Tom was 2 years old and the account balance is $15,000. Tom's grandmother also created a 529 plan when Tom was young and the balance has grown to $35,000. Tom's parents are going to apply for SSI and Medicaid (or Medical Assistance) for him and they need to know what to disclose as an asset to meet the means test requirements for the benefits. They should be truthful and disclose both assets but ultimately he has a problem on his hands.
First, lets understand what a 529 Plan entails. 529 Plans are education savings plans operated by a state or educational institution where the beneficiary can use distributions for post-secondary education expenses at a qualified educational institution. 529 Plans get preferential tax treatment under Federal income tax rules and can be created for a beneficiary at any age. Some states allow for income tax deductions for contributions to 529 Plans as well.
Second, an UTMA account or a Uniform Transfer to Minors Act account (also called UGMA or Uniform Gifts to Minors Act accounts) is established to safeguard monies gifted to a child that has not yet reached the age of majority. A custodian oversees the funds until the child can receive the funds. When the child can receive the funds depends on state law.
Lets go back to our situation. If Tom applies for government benefits, the 529 plan would not be seen as a resource to Tom. The plan is owned by Tom's grandmother and Tom has no right to withdraw funds from the account. Tom's grandmother could always change the beneficiary on the plan. Therefore, the 529 plan would not be considered a resource of Tom's and would not cause him to become ineligible for government benefits. What would be important, though, is making sure that the distributions from the 529 were used exclusively for educational expenses (which do not include food, clothing or shelter) so that distributions are not counted as income for Tom.
UTMA (or UGMA) accounts are treated different by your Social Security Office. The UTMA accounts are not counted as a resource until the child reaches the age of majority. Again, state law will determine when the account will be counted as a resource but it will eventually be counted and could cause the child to be ineligible for government benefits. Therefore, UTMA/UGMA accounts should be addressed sooner rather than later and you should always contact an expert concerning benefits in your state. It may be the case that the child starts receiving government benefits and only later when they reach a certain age (under the state law of majority) does the UTMA account cause the individual to become disqualifed for benefits. Since the assets held in the UTMA account are likely to cause issues, spending it down or a payback special needs trust may be option to consider. (see our Payback Special Needs bootcamp here)
Things to remember:
- Always be truthful with your local social security office. But it always makes sense to sit down with your financial advisor or your attorney before you file for benefits for your child to see if there are any assets that may be counted as a resource and cause your child to be ineligible for benefits and do something about it.
- 529 plans offer the ability to save for educational expenses with tax benefits. The account owner, though, should be cautious in how she applies distributions for educational expenses to ensure that it won't be considered a resource.
- UTMA accounts or UGMA accounts should be addressed before the individual with special needs applies for government benefits. It is possible that the monies could be spent down on the special needs individual or a payback special needs trust could be done. Always consult with an expert.