Tuesday, May 19, 2009

A grave problem with 529 plans and special needs children

Many people fund 529 plans to support a child's post-secondary education or training.

Please consult your attorney before acting on anything here, but our understanding is that this is a problem for special needs children.

The trouble is that if a child has 529 assets in their name when they turn 18, the assets over $3000 mean they will not qualify for disability associated medical assistance until the assets are depleted.

Instead some advisors suggest the creation of a supplemental needs trust (not a special needs trust). These can shelter funds for a special needs adult so that disability and medical assistance support is not impacted.

The supplemental needs trust can also fund education. For example, one could purchase tax free municipal bonds in the trust. The fund trustee, usually a parent or family member, can then use the funds to pay for education or training.

Some employers will also allow certain high income employees to defer compensation. It may be possible to then shift the deferred compensation to the fund. This definitely requires attorney review!

If you already have a 529 plan assigned to a special needs child, it can be shifted to another family member before the child turns 18.

To repeat -- you should not act on anything in this post without consulting a very experienced financial consultant or attorney. For example, Wikipedia has conflicting statements on the topic.

1 comment:

Glenn Trewitt said...

Summary: I don't believe that this concern is valid.

Disclaimer: I'm speaking from the point of view of someone who has 529 plans, some with my children as beneficiaries, some for nieces, and some for children of dear friends.

I'm also not a lawyer or such, but...

A 529 plan is *not* in the name of the child. It belongs to the person who set it up - the child is a "beneficiary". In fact, one of the nice things about 529 plans is that are not/should not be reported as the child's asset (although it does have to be reported as a parental asset w.r.t. your own children).

If that abstract claim wasn't enough, it is a fact that 529 assets can be freely moved (by the owner) from one child's account to another related child's account (up to cousins, but I don't know the exact limits). So, in theory, the special-needs child might have $1,000 in their account – or not even have an account - and have assets transferred in from a sibling at any time.