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 that enables you to give assets to your disabled family members 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 referred to as supplemental needs trusts) and ABLE accounts.
Why are Special Needs Trusts or ABLE accounts needed?
Disabled individuals are often eligible for needs-based government benefits such SSI, Medicaid, and food and housing assistance. However, these needs-based benefits require the disabled individual to meet an asset/resource limit in order to qualify. Disabled individuals who exceed this asset/resource limit (which varies depending on the benefit and the state) are generally not eligible to receive these needs-based benefits. Disabled individuals who are under this asset/resource limit must remain so in order to continue receiving these benefits.
Both Special Needs Trusts and ABLE accounts allow the disabled beneficiary to keep some private funds without jeopardizing their eligibility for these needs-based government benefits. Special Needs Trusts and ABLE accounts for a disabled individual’s benefit are ignored when determining whether the disabled individual is financially eligible for needs-based government benefits. Special Needs Trusts and ABLE accounts give the disabled 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 can be used to pay for the beneficiary’s housing, utilities, 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 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 a disabled beneficiary. 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 disabled 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 by needs-based government benefits.
How are SNTs funded?
SNTs may be funded with the disabled beneficiary’s assets (“first party SNT”) or by another person’s assets (“third party SNT”).
A first party SNT may only be set up by a disabled beneficiary under 65 years old. The trust must be irrevocable for the disabled beneficiary’s sole benefit and upon the disabled beneficiary’s death, the remaining trust assets must be used to reimburse Medicaid first. First party SNTs are typically funded to preserve a disabled beneficiary’s inheritance or personal injury proceeds.
A third party SNT may be set up for the sole benefit of a disabled beneficiary, fully funded by others. For example, parents may set up a third party SNT for their disabled child, funded either during the parent’s lifetime or at the parent’s death. Unlike first party SNTs, third party SNTs may be set up for the disabled beneficiary at any age and the trust assets remaining upon the disabled beneficiary’s death do not have to be reimbursed to Medicaid. Instead, trust assets remaining at the disabled beneficiary’s passing may be distributed to other family members such as the disabled beneficiary’s children or siblings.
What is an ABLE account?
ABLE accounts are tax-advantaged savings accounts for disabled individuals. The disabled beneficiary is the account owner. Contributions to an ABLE account may come from any source, including the disabled beneficiary, family members, friends, or even SNTs. Like contributions to 529 plans, contributions to ABLE accounts are not tax deductible for federal income tax purposes, but states may allow deductions. 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 disabled beneficiary’s passing, Medicaid may make claims to recover the funds disbursed for medical care during the disabled beneficiary’s lifetime.
Are all disabled individuals eligible to open an ABLE account?
The ABLE Act limits eligibility to disabled individuals of any age whose disability began prior to their 26th birthday. The disabled individual 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.
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 disabled beneficiary’s personal income tax return. If the first party SNT has its own Taxpayer Identification Number (separate from the disabled 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 disabled beneficiary’s personal income tax return and the disabled beneficiary will be responsible for paying the taxes. Distributions from the first party SNT may be made to the beneficiary to cover these taxes.
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 (separate 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.
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 SNT will be responsible for paying the taxes.
How are ABLE accounts tax advantaged?
Income earned by and distributions from the ABLE account for the beneficiary’s qualified disability expenses are tax-free.
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 2022, total contributions generally cannot exceed $16,000 per year but employed beneficiaries with earned income may exceed this annual limit. A beneficiary may only open one ABLE account. Currently, 46 states offer ABLE accounts, but a beneficiary may open an ABLE account in any state (assuming that state allows out-of-state beneficiaries). Each state has its own cap for how large an ABLE account can be, ranging from $235,000 to $550,000. However, once the ABLE account exceeds $100,000, the beneficiary’s SSI benefits may be suspended until the account balance drops back down below $100,000.