Those with special needs are often eligible for or already receiving public benefits such as income benefits and Medicaid. However, eligibility for these benefits is often “means tested”. In other words, if an individual has money he or she is not eligible for these benefits. This can be a problem for parents or grandparents of special needs children, or for individuals with health issues. Fortunately, appropriate planning can protect these funds while preserving eligibility for benefits.
1) Special Needs Trusts
A Special Needs Trust or “SNT” is used specifically to benefit disabled individuals; particularly those who are receiving public benefits (e.g., Medicaid, Social Security, etc.) or may receive those benefits in the future.
The funds in a SNT may only be used to supplement expenses not covered by public benefits. These expenses may include education, vacations and hobbies. The funds may not be used to pay for food, shelter or other expenses paid for by Medicaid or Supplemental Security Income.
Generally speaking, there are two classifications of SNTs:
If you wish to leave an inheritance to a disabled individual, regardless of age, the funds can be distributed into a trust designed to supplement the supports and services provided by public benefits. These trusts are not created nor funded until after death, and are often a component of one’s Last Will and Testament.
An Inter Vivos, or “lifetime” trust, may be used if you wish to set aside funds for a disabled individual during your lifetime. While substantially similar to the Testamentary Trust described above, including the limitations applied to use of trust funds, the largest difference is that these trusts are created and funded during lifetime for immediate use by the disabled individual.
After the beneficiary’s death any remaining funds are distributed to the successor beneficiaries designated by the trust.
Use of the funds in a first-party SNT is similar to a third-party SNT. However, a first-party SNT differs from third-party in that the trust is funded using the disabled individual’s funds such as the proceeds from a lawsuit or an inheritance.
Unlike a third-party SNT, a first-party SNT may only be funded by individuals under the age of 65 and, upon the beneficiary’s death, all remaining trust funds are used to pay back the state Medicaid agency for benefits paid out.
2. ABLE Account
The recently enacted Achieving a Better Life Experience Act created an additional planning tool: the “ABLE Account”. ABLE accounts are simple bank accounts owned by a disabled individual. The funds are used for purposes similar to those described above for SNT funds.
To qualify for an ABLE Account, onset of the disability must have occurred before the age of 26. Also, the account owner must be receiving Supplemental Security Income and/or Social Security Disability Income, or otherwise meet the Social Security definition of disabled.
Anyone can contribute to these accounts. However, total contributions may not exceed $14,000.00 per year and the account balance may not exceed $100,000.00 without negatively affecting the individual’s ongoing eligibility for public benefits. Finally, as with a first-party SNT any funds remaining in the account when the owner dies are used to pay back Social Security and/or Medicaid.
If you or a loved one is interested in protecting assets for a disabled beneficiary it is important to consult with a qualified special needs planner. Doing so will avoid negatively affecting ongoing or future eligibility for public benefits and maximize the protection of assets.