Having a comprehensive estate plan in place is important for everyone, regardless of your personal family life, and can cover a wide array of situations, including circumstances like who will make your medical or financial decisions if you are not able to, what will happen to your home or bank accounts, or who will care for your young children upon your death. For some families with children who have special needs, establishing a strong estate plan is crucial and often necessary to ensure proper care continues to be provided to their children even after the parents are gone. Below are some frequently asked questions regarding special needs planning.
What is special needs planning?
Special needs planning focuses on setting up a plan to provide assets to family members with disabilities for their lifetime use without jeopardizing their financial eligibility for needs-based government benefits like Medicaid and Supplemental Security Income (SSI). This is generally accomplished with special needs trusts (also known as supplemental needs trusts) and ABLE accounts.
Why are Special Needs Trusts or ABLE accounts needed?
Individuals with disabilities may qualify for needs-based government benefits such SSI, Medicaid, and food and housing assistance. However, individuals with disabilities can only qualify for these needs-based benefits if their income or assets do not exceed specific threshold limits. Individuals with disabilities who exceed this income or asset limit (which varies depending on the benefit and the state) are generally not eligible to receive these needs-based benefits. Individuals with disabilities who initially qualify under these income and asset limits must remain under these limits each year in order to continue receiving these benefits.
Both Special Needs Trusts and ABLE accounts allow the individual with disabilities access to some private funds without jeopardizing their eligibility for these needs-based government benefits. Special Needs Trusts and ABLE accounts for an individual’s benefit are ignored when determining whether the individual is financially eligible for needs-based government benefits. Special Needs Trusts and ABLE accounts give the individual access to private funds needed to pay for disability-related expenses that supplement, but do not replace, needs-based government benefits, including services that are not otherwise covered by needs-based benefits. For example, funds from special needs trusts or ABLE accounts can be used to pay for the beneficiary’s housing, furniture and appliances, household items, education, entertainment, clothing, vehicle or transportation, job training and support, assistive technology, personal support services, financial management, and other expenses that improve the beneficiary’s health, independence, or quality of life. However, funds from special needs trusts and ABLE accounts should not be used for expenses that are otherwise paid for or covered by needs-based government benefits such as Medicaid and SSI.
What is a Special Needs Trust?
A Special Needs Trust (SNT) is a trust that may be set up and funded for the lifetime benefit of an individual with disabilities. SNTs should be drafted by a qualified attorney, as there are specific trust provisions that must be included in the trust document in order to qualify the trust as an SNT under both federal and state law. For example, the trust should include specific SNT language that generally prohibits distribution of funds directly to the beneficiary but allows funds to be used to pay for goods or services for the beneficiary that supplement but do not replace goods or services provided or covered by needs-based government benefits.
How are SNTs funded?
SNTs may be funded with the assets of the individual with disabilities (“first party SNT”) or by another person’s assets (“third party SNT”).
A first party SNT may only be set up for the benefit of an individual with disabilities under 65 years old. The trust must be irrevocable for the beneficiary’s sole benefit and upon the beneficiary’s death, the remaining trust assets must be used to reimburse Medicaid recovery claims first. First party SNTs are typically funded as a last resort to preserve the beneficiary’s inheritance, or to hold the beneficiary’s personal injury settlements or awards.
A third party SNT may be set up for the sole benefit of a individual with disabilities, fully funded by others. For example, parents may set up a third party SNT for their special needs child, funded either with a lifetime gift or via inheritance at the parent’s death. Unlike first party SNTs, third party SNTs may be set up for the special needs beneficiary at any age and the trust assets remaining upon the beneficiary’s death are not subject to Medicaid recovery claims. Instead, third party SNT assets remaining at the beneficiary’s passing may be distributed to other family members such as the beneficiary’s children or siblings.
How are SNTs taxed?
First party SNTs are treated as grantor trusts, which means that the income earned by a first party SNT is reported on the beneficiary’s personal income tax return. If the first party SNT has its own Taxpayer Identification Number (different from the beneficiary’s Social Security Number), the trustee of the first party SNT will need to file a pro forma informational tax return. However, the income on the information tax return will still need to be reported on the beneficiary’s personal income tax return and the beneficiary will be responsible for paying the taxes on that income. Distributions from the first party SNT can cover these taxes for the beneficiary.
Third party SNTs may be set up as either grantor trusts or non-grantor trusts. If set up as a grantor trust, the income earned by the third party SNT is reported on the grantor’s personal income tax return and the grantor is responsible for paying the taxes. If the third party SNT has its own Taxpayer Identification Number (different from the grantor’s Social Security Number), the trustee of the third party SNT will also need to file a pro forma informational tax return but the income will still need to be reported on the grantor’s personal income tax return so the grantor can pay taxes on that income. If set up as a non-grantor trust, the trustee of the third party SNT will need to file a tax return for the trust, and the third party SNT will be responsible for paying its own taxes.
What is an ABLE account?
ABLE accounts are tax-advantaged savings accounts for individuals with disabilities. The individual with disabilities is the ABLE account owner. Contributions to an ABLE account may come from any source, including the owner, family members, friends, or even SNTs for the benefit of the owner. Like contributions to 529 plans, contributions to ABLE accounts are not tax deductible for the donor for federal income tax purposes, but states may allow deductions for state income tax purposes. ABLE accounts are offered at the state level and opening an ABLE account can usually be done via the state’s ABLE program website. Upon the owner’s passing, Medicaid may make claims to recover the funds disbursed for care during the owner’s lifetime. Currently, 46 states, plus Washington D.C. offer ABLE accounts, but an individual with disabilities may open an ABLE account in any state (assuming that state allows out-of-state account owners).
How are ABLE accounts tax advantaged?
Earnings and growth in the ABLE account are tax free and distributions for the owner’s benefit are tax free as long as they are for qualified disability expenses such as education, living expenses, housing, transportation, personal support services, legal fees or financial management.
Are all individuals with disabilities eligible to open an ABLE account?
Currently, the ABLE Act limits eligibility to individuals of any age whose disability began prior to their 26th birthday. Starting January 1, 2026, eligibility will be expanded to those whose disability began prior to the 46th birthday. The individual with disabilities must be unable to perform work for or intended for pay or profit because of a physical or mental impairment that is either expected to result in death or has lasted or is expected to last at least 12 consecutive months, as certified by a licensed physician.
Are there dollar limits for how much an SNT or ABLE account can be funded?
There are no limits as to how much an SNT may be funded, either annually or on a cumulative basis. None of the SNT’s assets are counted when determining the beneficiary’s eligibility for need-based government benefits, no matter the size of the SNT.
For ABLE accounts, total annual contributions from all sources are tied to the gift tax annual exclusion. For 2025, total contributions generally cannot exceed $19,000 per year but employed owners with earned income may also contribute some of their earnings up to the federal poverty level limit. Each owner may only open one ABLE account. Each state has its own cap for how large an ABLE account can be, ranging from $235,000 to almost $600,000. However, once the ABLE account exceeds $100,000, the owner’s SSI benefits may be suspended until the account balance drops back down below $100,000. Furthermore, since ABLE accounts are subject to Medicaid recovery claims upon the owner’s passing, it is usually best not to let them grow too large.
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