Author: Tiffany Wingo, JD
Last month’s newsletter detailed the various types of special needs trusts. If you have a family member with a disability, you should consider incorporating a special needs trust into your estate plan. The disabled family member may be subject to income or asset rule limitations for public benefits, which may be violated by an inheritance and result in a loss of benefits. A special needs trust preserves their eligibility for public benefits while also allowing you to transfer assets that can be used to enhance their quality of life by paying for allowable expenses not covered by public benefits such as private nursing, technology, vehicle expenses, hearing aids, clothing, and even entertainment or travel costs.
A special needs trust (“SNT”) is important for three reasons. First, the SNT prevents direct ownership of the assets by the beneficiary so that the assets do not count towards the beneficiary’s asset limit. Often, a home for the special needs beneficiary is included as a trust asset. Second, the SNT includes specific language stating that the assets are only to be used to supplement public benefits and may not replace public benefits. Finally, the SNT gives the trustee discretion over distribution of the assets. Proper distribution of the assets in accordance with the rules for special needs trusts prevents the beneficiary from losing eligibility for public benefits. Trustee control over the assets also protects the special needs beneficiary from financial exploitation or poor financial decisions.
The type of trust that you would incorporate into your estate plan is a third-party special needs trusts since it will be funded by someone other than the person with a disability. The SNT may be a stand-alone document or may simply be incorporated within your revocable trust document. Your revocable trust should state that the share for the disabled beneficiary shall be distributed to the SNT, either contained in your revocable trust document or a separate document. Generally, you can just include the SNT provisions in your revocable trust, but establishing a stand-alone special needs trust may be beneficial if, for example, there are grandparents or other family members who may want to leave an inheritance to the special needs beneficiary. Those individuals can direct the inheritance for the disabled beneficiary to the stand-alone special needs trust either through their own trust document or an account beneficiary designation. In either case, it is important to note that the eligibility rules for Medicaid and some other public benefits are state-specific, so the SNT provisions also need to be state-specific. If the beneficiary is receiving SSI, the trust language should also be approved by the Social Security Administration.
Combining a special needs trust with an ABLE account provides certain advantages. An ABLE account is a tax-advantaged account available to disabled individuals whose disability began before age 46. These are accounts where earnings grow tax-deferred, similar to a 529 college savings plan. Withdrawals are tax free when used for qualified disability expenses. A beneficiary is eligible for an ABLE account if he or she is receiving SSI or SSDI. If he or she is not already receiving those benefits, then a licensed physician must certify the disability. The beneficiary may contribute their own funds to an ABLE account, or others may contribute on their behalf. The annual contribution limits are $20,000 per beneficiary, and most states set the total account contribution limit at $300,000; however, amounts over $100,000 may affect eligibility for SSI and other benefits.
If you combine the use of an ABLE account and an SNT, you would want to transfer larger assets, such as real estate or a large investment account, to the SNT. The ABLE account would hold a smaller amount of discretionary funds that would be available to the beneficiary for smaller, routine qualified expenses, such as groceries and clothing, without having to wait for trustee approval. The ABLE account lets the individual have more autonomy over everyday spending, allowing them more independence. The SNT can even transfer funds to the ABLE account to reduce administrative costs for the trust by allowing the beneficiary some discretionary funds.
Each family’s situation is unique, and planning for a disabled beneficiary may involve the use of several tools. The primary concern should be ensuring that the inheritance you leave your disabled beneficiary provides for their supplemental needs but does not result in a loss of benefits. While the attorneys at Great Plains Trust are unable to draft your estate planning documents, please contact us if you would like further information about planning options.
