Should Your Child With Special Needs Have a College Savings Account?

saving-for-college1This is a common question for parents of kids with special needs, particularly when the individual is very high functioning and has aspirations to attend college.  In some cases, a family member may have established a college plan for the child without understanding the possible effect the account can have on the child’s eligibility for government benefits, including Supplemental Security Income (SSI).  College savings accounts are governed under Section 529 of the Internal Revenue Code so they are often referred to as 529 Plans or Qualified Tuition Programs (QTP).

First, let’s review how eligibility for SSI works.  SSI is available to disabled individuals who have never worked or who have not worked enough to qualify for Social Security Disability Insurance (SSDI). Eligibility for SSI is subject to income and asset limits.  When an individual is under the age of 18, the Social Security Administration considers the parents’ assets and income when calculating financial eligibility.  This is referred to as deeming.  Once the child turns 18 and becomes an adult, they are no longer deemed to their parents’ record and their financial resources are reviewed independently.  Consequently, when the individual turns 18, he or she is typically able to qualify for SSI because the individual now meets the income and asset limits.  Currently, the asset limit to qualify for SSI is $2,000.  So, if an individual is over the age of 18, has less than $2,000 and meets the other eligibility criteria, he or she will be eligible for SSI. If the individual has more than $2,000 of countable assets they will not qualify.  This is why it is important to understand how College Savings Accounts work in terms of eligibility.

The basic rule is assets in a Section 529 plan are considered by Social Security to be a countable resource to the owner of the account.  Typically, the owner of the account is a parent or grandparent, therefore, the funds in a 529 account will not interfere with your child’s eligibility for government benefits once he or she turns 18.

Distributions from the account to the designated beneficiary (the disabled adult child) are considered a gift.  As long as they are used for the child’s educational expenses, they are excluded as income in the month of receipt and will not affect your child’s SSI income.  If the distribution is not spent in the month of receipt, it is excluded for nine months beginning from the month after the month of receipt.  If the distribution is spent for non-educational purposes, it is treated as income to the beneficiary and will reduce your child’s SSI income.

Even though in most cases 529 plans will not affect your child’s SSI, there are still factors to consider when determining whether this type of account is beneficial for your child.  Those factors would include whether your child with special needs will actually go to college.  If he or she has a 529 plan and does not go to college, you will want to change the beneficiary of the account to another family member.  If you do not have another family member who can benefit from the 529 plan, you can get your money back but it will be subject to income tax and a penalty.

Some families have established custodial accounts under the Uniform Transfer to Minors Act (UTMA) for their child with special needs.  These are custodial or trust accounts for a minor.  The assets in the account are owned by the minor but controlled by the custodian, typically the parent or grandparent. These types of accounts are countable for SSI purposes and if the assets in the account exceed $2,000, the account will cause your child to be ineligible for SSI benefits.  Also, these assets, unlike assets in a 529 account, are not transferrable to another beneficiary nor can they be transferred back to the parent from the child’s custodial account.  This clearly creates an issue if the retirement account is a UTMA account and then the owner/beneficiary needs to qualify for government benefits.  One option for dealing with the UTMA account is to spend the money for the child and then apply for SSI.  Or, the money could be transferred to a 529 plan but with this type of transfer there are additional restrictions not normally associated with a 529 plan.  Another option would be to transfer the funds in the UTMA account to a First Party Special Needs Trust, but there are drawbacks and limitations associated with this as well.

Establishing a college savings account for your child with special needs might be beneficial but it is our recommendation you consult with an elder law attorney to evaluate your specific circumstances before doing so.  If you want more information related to planning for your child with special needs, please contact the Law Offices of Hoyt & Bryan at (407) 977-8080 or visit our website, HoytBryan.com.