About the Author
David Fulton is a Colorado Springs, CO fee-only financial planner providing Hourly and On-Going Financial Planning and Investment Management. While he works with a broad range of clients, David specializes in working with Active and Retired Military, Federal Employees, and Families with Special Needs Children.
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The ability to provide for a loved one after they are gone is perhaps the biggest concern shared by parents of special needs children. The costs of a lifetime of caregiving can be cost prohibitive. We all are trying our best to set the conditions, but some have greater means than others. Fear not; there is hope.
What Social Security disability benefits exist for children? While there is still much room for improvement there are existing programs designed to help families just like ours. Many parents have researched the benefits of Supplemental Security Income (SSI) and Social Security Disability Income (SSDI). If you have yet to do so I’ve written about it extensively here . Both programs are designed to provide some material and financial support to those with disabilities, however, come with considerable constraints and limitations.
Basic Social Security rules allow a wage earner who is receiving disability or retirement benefits and has paid more than a minimum amount of Social Security taxes over their lifetime to pass on benefits to their minor children. In addition, when an insured wage earner dies, a child receives survivor benefits until age eighteen. The problem though is what happens to that child when they become an adult? What are the benefits even for a disabled adult living with their parents?
There is an even more impressive program for our disabled children that many families don’t know about because it is not very well advertised. Even after a child turns eighteen, a disabled adult child of a retired, disabled, or deceased wage earner may also receive benefits on the account of a parent. This program allows your child to receive benefits as a “Disabled Adult Child” or “DAC”. A DAC who has never paid any Social Security tax may receive Social Security benefits on a parent's account beginning when that parent retires, becomes disabled, or dies. This is an incredible benefit that comes as a surprise to many parents. As a parent of a special needs child, you should remember the term DAC; it will play a significant role in your long-term financial planning.
What Makes a DAC a DAC?
Most people who have a serious disability before turning age twenty-two are not able to accumulate the necessary work record to qualify for SSDI on their own. But people in this situation may instead be able to qualify for SSDI on their parents' work record, in certain situations.
Disability prior to age 22.
DAC benefits are available to individuals who have had special need since before turning twenty-two years of age. As such, the amount of DAC benefits is calculated based upon the parent's work records. Once the parent's Social Security benefits are determined, the child generally will receive a percentage of such benefits.
What is considered to be a disability? It is important to understand how the Social Security Administration (SSA) defines a disabled adult child. SSA considers someone disabled if: you cannot do work that you did before; you cannot adjust to other work because of your medical condition(s); and your disability has lasted or is expected to last for at least one year or to result in death.
SSA regulation § 404.350 expands on the basic definition of disability and defines who is entitled to DAC benefits. That regulation states that your child is entitled to DAC benefits if: they are the insured person's child, they are dependent on the insured, they apply for the benefits; they are unmarried; and they are under age eighteen; OR are eighteen years old or older and have a disability that began before you became twenty-two years old. As a parent, you must also be receiving Social Security benefits due to retirement or disability or perhaps are receiving benefits from a spouse who has died (survivor’s benefits).
Calculating DAC Benefits
The amount of benefits your DAC will qualify for will depend on which parent’s record is chosen, if the parent has passed away or is disabled or retired, and if anyone else is drawing off the earning record for the identified parent. It is important to note your child can collect off of the earnings record of either their mother or father, but not both, so choosing the parent with higher earning potential is important to maximize the level of benefits.
If someone else is drawing off a parent’s earnings record, this may cause your child's DAC benefits to go down. For example, if your child is collecting from your record, and your spouse is also collecting spousal retirement benefits from your record, both benefits will be reduced due to what is called a Maximum Family Benefit. Social Security's Family Maximum Benefit rules are complex and affect beneficiaries in different ways, depending on their earnings levels and benefit types. In particular, the rules that apply to disability beneficiary families differ significantly from those that apply to retirement and survivor beneficiary families. You can see on the chart below how the Maximum Family Benefit reduces benefits by segment.
The base rate for DAC benefits is 50% of a living parent's primary insurance amount (PIA), or 75% of the PIA of a deceased parent. The actual rate payable could be lower if the family maximum is involved (see note above), which could be the case if and when your spouse becomes entitled to benefits on your account. Your child's DAC benefits would be calculated based on your full retirement age benefit rate (PIA), regardless of when you start drawing your benefits. And, as noted previously, he or she would not be able to receive DAC benefits on your record until you start drawing your own benefits. It is important to note that the disability payment to a DAC will not decrease the parent’s own retirement benefit so there is no reason not to pursue these benefits.
For 2018 the maximum benefit for a retiree who worked full-time is $2,788. In this example, the retiree's fully disabled adult child would receive a payment of $1394 at 50% if the parent was still living. If the parent passed away, the child's benefit would increase to $2091 at a 75% rate (subject to the family maximum)
DAC and SSI
Many disabled persons will have qualified to receive SSI benefits for much of their life, with the majority having earned SSI since they turned eighteen years of age if their total income was less than $2000. Because they were already earning SSI benefits, when they become eligible for DAC benefits the SSA determines the level of DAC benefits in conjunction with those already covered by SSI.
If your child’s DAC benefits are lower than maximum SSI (currently $750/month for 2018) SSI disregards the first $20 of other income. This means they will likely only get an additional $20 added to their current SSI. However, if your child’s DAC benefits are higher than maximum SSI, they won’t receive SSI anymore and will only get the DAC Benefits. This is a good deal, because they will get a higher disability payment, and will no longer have to follow any of the very strict SSI financial rules; DAC rules are considerably more lax.
Using our previous example, the DAC earning 50% of their living parents PIA would earn $1394 in DAC benefits. However, because $1394/month is higher than the $750/month in SSI, they would no longer qualify for SSI.
Switch it up to get the Best Benefit
Your child can start out on one parent’s work record and then switch to another one (if the second parent later retires or passes away). Or they can start out with dependent’s benefits and then switch to survivor’s benefits when one parent dies (survivors benefits are usually higher). SSA will normally give you whatever benefit is the highest but is generally up to you or your child to initiate the change.
Watch out for Marriage
Unfortunately, marriage can become a significant hindrance for disabled adults. If your adult child qualifies for DAC benefits, he or she can receive benefits only as long as he or she remains unmarried. Sadly, the benefits will end if he or she marries unless they marry another disabled adult child. They can still apply for SSI (or stay on SSI), but if they get married to someone with income, the SSI will be reduced or go away completely depending on their spouse's earnings.
How DAC Benefits and Medicaid Coincide
We’ve established that a disabled adult child can earn disability income, however, DAC recipients need to be careful that they do not lose their Medicaid benefits. If the individual receiving DAC benefits also receives Medicaid benefits, he or she will need to monitor the benefits closely to ensure he or she does not lose those Medicaid benefits.
DAC benefits are often much higher than the SSI benefits that the individual is also receiving. As a result, receiving DAC benefits in some cases could cause the individual to lose his or her SSI benefits. As a result of lost SSI, it may in turn cause a loss of Medicaid benefits. Fortuitously, Congress passed a law to fix this discrepancy. Individuals who receive DAC benefits that are high enough to cause a loss in SSI benefits will be able to retain their Medicaid benefits as long as they still meet all the other criteria for SSI benefits. Namely if they: are unmarried or married to another beneficiary who is receiving DAC benefits; lost benefits for SSI after July 1, 1987, because of the increase in DAC benefits; had a special need before the age of 22; and would be currently eligible for SSI benefits if it wasn't for the DAC benefit.
While income from DAC benefits shouldn't affect your Medicaid due to the change in law, other kinds of income still will so you must be careful. Your child must still stay under the asset limit of $2,000 (not including DAC benefits). One tool that can help with staying under the asset limit is to open an ABLE Account on your child’s behalf. I’ve written about ABLE accounts here.
DAC Benefits and Long-Term Planning
Many of us will have done the hard work of establishing the proper estate planning documents for our special needs child. This likely includes a Special Needs Trust. Once the SNT is established, the difficulty is in determining how much we need to save and commit towards that trust to account for a lifetime of requirements.
This can be a very daunting task and the savings rate can be very high. As a result, many people choose to use life insurance as a funding mechanism for their child’s SNT. However, knowing how big of a policy to purchase is also a difficult decision. Fortunately, because of DAC benefits, you can feel more secure knowing some of the burden will be shared by the generosity of our fellow citizens.
If your child meets all of the qualifications for DAC benefits I outlined above, you can feel somewhat confident in using an estimate of those benefits as a baseline for projected income over the course of your child's remaining life. As a parent, you are only really working to save the delta between the amount you are projecting your child will need to sustain a comfortable lifestyle, and the benefits already provided through the SSA. Remember the term DAC; it will play a significant role in your long-term financial planning.
Have more questions? Follow this link to an older but still relevant article by Thomas Bush.