Special Needs Planning
Special Needs Planning:
Special needs planning is an important part of your estate planning when you have a child or family member with special needs. There are unique issues and estate planning techniques that should be considered.
A “special needs” beneficiary is a person who, because of one or more physical and/or mental disabilities, is unable to be financially self-sufficient. Because of such disabilities, additional, specialized services, planning and accommodations should be considered.
If you have a special needs beneficiary with the legal capacity to understand and sign legal documents, it is important for him or her to sign basic legal documents such as an Advanced Medical Directive and a Financial Power of Attorney. By doing so, you may be able to avoid the need of guardianship if he or she later becomes unable to make medical and financial decisions.
Often, government benefits are available to special needs individuals who are destitute and are unable to work. Examples of such programs are Supplemental Security Income (SSI), Medicaid, and local Medical Assistance programs. If a special needs beneficiary inherits money, the inheritance could result in being disqualified from such programs.
Specialized estate planning is available to provide for your special needs beneficiary and at the same time preserve eligibility for government benefits.
Instead of leaving assets directly to your special needs beneficiary upon your death, they can be distributed to a “third party” discretionary spendthrift trust, sometimes called a special needs trust. The assets distributed into such a trust can be set aside for the exclusive use and benefit of your special needs beneficiary. You will choose the Trustee of the trust who will have total discretion as to when, how, and to what extent (if at all) the trust assets shall be distributed to or for the benefit of your special needs beneficiary. A special needs trust is designed to supplement, rather than take the place of, government benefits available to your special needs beneficiary. If the trust is created and administered properly, your special needs beneficiary will remain eligible for needs based government benefits.
A third party special needs trust is funded by assets owned by persons other than the beneficiary. However, it is not the proper trust for assets initially owned by the beneficiary.
Suppose your special needs beneficiary inherits assets from a family member. Perhaps he or she receives a settlement from a personal injury or medical malpractice case. Suppose also that the receipt of such assets would disqualify your special needs beneficiary. A different kind of trust, called a “first party” special needs trust, would be needed. The term “first party” is used because the trust assets are owned by the special needs beneficiary; that is, the “first party.”
A first party special needs trust is also designed to preserve needs based government benefits and to supplement, and not take the place of, such benefits. It is different from a third party special needs trust because:
- It must be irrevocable; that is, once put into effect, it cannot be changed or revoked.
- The beneficiary must be below the age of 65 years when it is established.
- The trust can only be funded by the assets of the special needs beneficiary.
- If the special needs beneficiary is a minor, it must be established by a parent, grandparent, guardian or the court.
- When the beneficiary dies, the remaining trust assets must be used to reimburse the Medicaid agency of the state that provided any such benefits to the special needs beneficiary.
A new tool available to your special needs beneficiary is called an ABLE account. An ABLE account allows your special needs beneficiary to save money without jeopardizing disability benefits. Although ABLE accounts are the result of a federal law called the Achieving a Better Life Experience (ABLE) Act, they are established and managed by the state.
Maryland has an ABLE program for special needs beneficiaries. The Maryland ABLE program is open to Maryland residents and nonresidents as well.
There are both federal and state rules for ABLE accounts. The federal rules are:
- Your ABLE beneficiary must have a qualifying disability that began before age 26.
- Only one ABLE account is allowed per beneficiary.
- Anyone may contribute to the ABLE account, including your special needs beneficiary.
- If your special needs beneficiary is receiving SSI benefits, the account may not exceed $100,000.00.
- The annual contribution limit is $15,000.00. This limit is tied into the annual, federal gift tax exclusion.
- Distributions must be used only for expenses related to blindness or disability.
- The income generated from an ABLE account is not subject to income tax as long as long as distributions are used for qualified disability expenses.
- When your special needs beneficiary dies, any remains account funds will be used to reimburse Medicaid for benefits received during his or her lifetime.
In addition to the federal rules, Maryland has the following additional rules:
- ABLE accounts are limited to $500,000.00 (remember, a balance of over $100,000.00 will effect SSI eligibility).
- In addition to the $15,000.00 annual contribution limit, Maryland allows an additional contribution of up to $12,140.00 of a beneficiary’s annual salary if he or she is working for a total possible annual contribution of $27,140.00.
- A minimum of $25.00 is required to open a Maryland ABLE account.
- Maryland offers up to a $2,500.00 income tax deduction per contributor per beneficiary on the contributor’s Maryland income tax return.
If you have a special needs beneficiary in your family, there are many factors to consider and planning techniques available. Your family situation is unique and requires particular attention to the details, facts and personal dynamics of your case. We can assist you to design an estate plan that will preserve and supplement the disability benefits to which your special needs beneficiary is entitled.
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