Is a Special Needs Trust Right For Your Family?
Options for ensuring that your disabled descendants will be taken care of.
If you have a child or grandchild with disabilities, naturally you want to ensure that they will be financially taken care of after you pass on. However, receiving an inheritance may reduce the amount of government assistance they may qualify for, or may disqualify them altogether. One of the ways to prevent this from happening is to set up a special needs trust for the individual.
What Is a Special Needs Trust?
A special needs trust, also known as a supplemental needs trust, is an estate planning tool that sets aside money for a disabled heir that is excluded from being counted as income when determining eligibility for government benefits, such as Medicaid and Social Security. It also provides a better quality of life beyond what they are able to receive from those benefits, such as more specialized medical care, education, and travel expenses to stay in touch with loved ones.
Types of Special Needs Trusts
There are two main types of special needs trust. They function essentially the same way; the difference between them depends on whose assets are funding the trust. However, be aware that any remaining assets in a first-party special needs trust at the time of the beneficiary's death must be paid back to the state to compensate for the benefits they received. Third-party trusts do not have this requirement.
First-Party Special Needs Trusts
First-party special needs trusts are established with assets that belong to the beneficiary and are often used when they have received an inheritance or court settlement. They are also useful when somebody with established assets becomes disabled, in order to help them qualify for public benefits. These types of trusts can be created by the beneficiary themselves, or by parents, legal guardians, or the courts. First-party trusts are irrevocable, meaning the terms cannot be altered and the assets can only be used to benefit the beneficiary.
Third-Party Special Needs Trusts
Third-party special needs trusts are established by someone other than the beneficiary, often by a parent, grandparent, or another family member. They can be incorporated into that individual’s estate plan, and the beneficiary will receive the assets at the time of that family member’s death. They can also be created independently and funded from multiple sources. Depending on how much flexibility you want for changing the terms, these trusts can be set up to be revokable or irrevocable.
ABLE Accounts: An Alternative to Special Needs Trusts
While special needs trusts are great asset protection tools, they are not the only options when it comes to ensuring your disabled family member will be cared for. ABLE (Achieving a Better Life Experience) accounts are savings accounts with tax advantages. The assets in the account are available to the beneficiary but are not counted as a resource when it comes to qualifying for benefits or paying taxes.
These accounts are exclusively for people who become disabled before the age of 26, and are easier and less expensive to set up than special needs trusts. In addition, there are fewer limitations on how the assets can be used. However, there is a limit to how much can be contributed to the account per year. In 2022, this limit was increased to $16,000.
Deciding Whether a Special Needs Trust Is Right For Your Family
There are advantages and disadvantages to special needs trusts and ABLE accounts, and there are many factors to consider to determine which type would be most beneficial for your family situation. Be aware that it is possible to simultaneously set up both an ABLE account and a special needs trust, so that your disabled family member will be protected now as well as after your death. Before making any decisions, however, it is wise to consult with an estate planning attorney to go over all of your options.