Special Needs Trusts

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April 22, 2016
Special Needs Trusts

If you are a primary caregiver for a family member or friend who is mentally or physically disabled one of your greatest concerns is likely for the care of that person after your passing.

For those in such a situation, a Special Needs Trust can prove quite beneficial. A Special Needs Trust is designed for beneficiaries with some sort of disability. They were given legal status by congress in 1993 and are also known as Supplemental Needs Trusts.

  • This trust can be drawn up by your Estate Planning Attorney—it is not complicated.
  • The trust can stand alone or form part of a last will and testament.
  • It allows the beneficiary to enjoy the use of property/assets held in their trust while also allowing the disabled person to receive the basic government benefits (may include: SSI, Medicaid, Vocational Rehabilitation and even Subsidized Housing)
  • Congress required the trust to be irrevocable and non-reversible.
  • It can be managed by family members—a private trust, or by trustees appointed by the court. (Helpful in the case of a young child)

In addition to the Special Needs Trust, a new tax-advantage saving account was passed by congress in December 2014. This account is called an ABLE—“Achieving a Better Life Experience.” ABLE accounts are 529 plans modeled after 529 Education Savings Plans. These plans allow tax-free growth and disbursements for family members with disabilities and other special needs.

  • Like Special Needs Trusts, ABLE accounts shelter assets from Medicaid’s calculations (a $2,000 limit of assets owned by the disabled person).
  • ABLE accounts allow families to save up to $14,000 per year and save up to a maximum of $100,000 before affecting federal benefits.

While the tax free growth is a huge incentive, most planners still have some concerns regarding ABLE Plans.

  • Distributions must be used for “qualified expenses” which are not yet defined; money spent for non-qualified items are subject to a 10% tax.
  • Unlike Special Needs Trusts, ABLE accounts can be established in the name of the disabled person. This puts the assets under control of the beneficiary, which may not be ideal.
  • ABLE accounts are not reported as qualified expenses on tax returns like 529’s. States will make the determination, which could lead to more requirements for reporting and possibly make things more expensive to maintain. These things obviously need to be worked out to avoid costs depleting the tax free status of assets.
  • The most disturbing point to most planners is that upon the beneficiary’s death, money left over is used to reimburse Medicaid for expenses.

In other words “if you don’t use it you lost it” and most of us aren’t fond of the government as a beneficiary of our hard earned money. One possible solution would be for families to use a special needs trust for larger assets and the ABLE money for day to day needs. ABLE Plans, in this writer’s opinion, could be a viable option to help disabled family members once all the unknowns are known.

National Special Needs Network:             http://www.nsnn.com/
National Down Syndrome Society:           http://www.ndss.org