Having an estate plan in place ensures your and your family’s needs for the future, but it is particularly important if you have a child with special needs.
You have spent your life and resources dedicated to caring for your special needs child. However, once your child turns 18, the criteria for getting essential benefits shifts from you to them. Leaving money to them for their future care can jeopardize their eligibility for means-based government programs like Medicaid and Supplemental Security Income.
Creating a special needs trust or establishing an ABLE account can offer you peace of mind, knowing your child’s financial future and benefits are protected.
What is a Special Needs Trust?
A special needs trust (SNT) is a legal arrangement that allows you or another grantor to set aside funds for your special needs child without affecting their eligibility for government programs.
A special needs trust is designed to provide for the extra needs of your child’s care that are not covered by these benefits, such as their personal care attendants, recreational and cultural experiences, and any out-of-pocket medical and dental expenses.
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Why is This Important?
Once your child turns 18, they are legally considered an adult, and eligibility for government benefits will be based on their financial resources. Leaving money to them without the benefit of a trust could cause them to lose these critical benefits.
Establishing a special needs trust ensures that your child has access to resources that can enhance the quality of their life while still maintaining eligibility for programs such as Supplemental Security Income (SSI) and Medicaid. While these programs are essential lifelines for special needs individuals, they are limited in what they cover.
A special needs trust can allow your child to
- Keep their SSI and Medicaid benefits
- Use the trust’s funds for their personal needs, such as living expenses, groceries, utilities, and other things not covered by government benefits
- Use the funds to pay for medical professionals who are not covered by benefits or who do not accept Medicaid
- Use funds to pay for copays and deductibles
With a special needs trust, your child benefits from resources that can enhance their quality of life without losing access to the support programs they rely on.
Can You Act As a Trustee?
Many parents choose to serve as trustees to ensure that the trust is managed in their child’s best interests. In this case, you will want to appoint a co-trustee or successor trustee in the event you can no longer manage the trust.
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What Types of Special Needs Trusts Are Available?
There are three types of special needs trusts. What is best for your family will depend on how the trust will be funded, how it will be managed, and what will happen to the assets in the trust upon the beneficiary’s death.
First-Party Special Needs Trust
A first-party special needs trust is funded with assets already belonging to your child, usually from a personal injury settlement or inheritance. The trust can be established by parents or grandparents, a guardian, conservator, Power of Attorney, or the court on behalf of the special needs individual. However, a first-party special needs trust will be subject to Medicaid payback provisions, meaning that any remaining funds in the trust at the time of the beneficiary’s death must be reimbursed to Medicaid for any benefits used over the individual’s lifetime.
Third-Party Special Needs Trust
A third-party special needs trust is established and funded by someone other than the beneficiary, generally parents or grandparents. A third-party special needs trust is not subject to Medicaid’s payback provisions, so the remaining funds will be distributed according to its terms after the beneficiary’s death.
Pooled Trust
A pooled trust, also known as a (d)(4)(C) trust, is established by a nonprofit organization to serve a particular disabled community. Funds are pooled and invested in a common fund with the assets of other disabled individuals, each maintaining their own subtrust and tax ID number. Any funds remaining after the death of the beneficiary will be retained by the nonprofit as a charitable donation.
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Should You Establish a Special Needs Trust?
Considering a special needs trust will require a careful understanding of each type of trust, your child’s needs, and your family’s unique circumstances.
Some key considerations should be:
- Your child’s needs – What are your child’s current and anticipated future needs?
- The source of the funds – If your child has assets from an injury claim, an inheritance, or other sources, a first-party trust might be appropriate. However, if funding comes from you or other family members, a third-party trust is usually the best option.
- Legal and financial considerations – Consider the complexity and how much control you want over the trust. Third-party trusts are generally simpler to establish and administer and provide more flexibility and control for the family. You will also want to understand any tax implications each type of trust may have.
- Consider Medicaid payback provisions or nonprofit requirements to fully understand how any funds left in the trust will be handled.
- Evaluate your trustee options – Although you may wish to choose a family member, they must understand the responsibilities and have the time and ability to manage the trust. You may also consider a professional trustee if the trust is complex or you are concerned about family dynamics. Nonprofit organizations professionally manage pooled trusts.
- Seek the guidance of an estate planning attorney who specializes in special needs planning – If a trust is not properly structured or funded, your child could be disqualified from receiving essential benefits they will need.
Getting Additional Support Through an ABLE Account
The Achieving a Better Life Experience Act, or ABLE Act, allows for tax-advantaged savings accounts that help special needs individuals and their families save for disability-related expenses without jeopardizing their government benefits through Medicaid and SSI.
To qualify for an ABLE account, your child must have a significant disability with an onset before the age of 26, which makes them eligible for SSI or Social Security Disability Insurance (SSDI). Annual contributions are limited, and funds must be used specifically for qualified disability expenses, but there are also significant advantages:
- Funds in an ABLE account will not count toward resource limits for programs like SSI and Medicaid
- Any earnings from the account are tax-free
- ABLE accounts have a broad range of eligible expenses
- Accounts empower individuals with special needs to save and manage their own funds.
Each state has its own ABLE program with differing features, fees, and investment options. You can find the specific information for Virginia’s ABLE program here.
Getting the Assistance of a Special Needs Estate Planning Attorney
Planning for your special needs child to move into adulthood can be emotionally and legally overwhelming. Securing a more stable financial foundation for them can provide critical peace of mind.
At Melone Hatley, P.C., our estate planning attorneys have specific expertise in special needs planning. We will help you understand and navigate the complexities of special needs trusts and ABLE accounts, create a tailored plan that meets your and your family’s unique needs, and help you feel more prepared when the time comes. Call us at (877) 560-3568 or contact us through our website contact form to schedule a free consultation. We have convenient offices throughout Virginia as well as Charlotte, North Carolina and Tampa, Florida.
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