Parents want to take care of their children even after they pass away. However, children with special needs have increased financial and assistance needs, so ensuring their long-term welfare can be a bit tricky. Proper planning by parents is essential to benefit a child with a disability, including an adult child, as well as help any siblings who may be left with the responsibility to take care of their brother or sister with special needs.
Special Needs Trusts
The best and most comprehensive option to protect a loved one is to set up a special needs trust (also referred to as a supplemental needs trust). These trusts allow beneficiaries to receive inheritances, gifts, lawsuit settlements or available funds. At the same time, the recipient will not lose their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). The trusts are drafted so that the funds will not be considered to belong to the beneficiaries in determining their eligibility for public benefits.
Three main types of special needs trusts are available:
- A first-party trust is designed to hold a beneficiary’s own assets. While the beneficiary is living, the funds in the trust are used to benefit the beneficiary, and when the beneficiary dies, any assets remaining in the trust are used to reimburse the government for the cost of medical care. These trusts are especially helpful for beneficiaries who receive Medicaid, SSI or other needs-based benefits when they come into large amounts of money. This is because the trust allows the beneficiaries to retain their benefits while also being able to use their own funds when necessary.
- The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold virtually any kind of asset imaginable that belongs to the family member or other individual. Such items include a house, stocks and bonds, as well as other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect a beneficiary’s access to benefits. Additionally, the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. However, a third-party special needs trust does not contain the “payback” provision that is found in first-party trusts. Essentially, what that means is when the beneficiary with special needs dies, any funds remaining in the trust can pass to other family members, or to charity, without having to be used to reimburse the government.
- A pooled trust is another alternative to the first-party special needs trust. With this option, a charity sets up the trusts that allow beneficiaries to pool their resources with those of other trust beneficiaries for investment purposes, all while maintaining separate accounts for each beneficiary’s needs. When the beneficiary passes away, the funds remaining in the account reimburse the government for care, but a portion also goes towards the non-profit organization responsible for managing the trust.
Not everyone has a large chunk of money that can be left to a special needs trust, so life insurance can be an essential tool if one is in that type of situation. If you have established a special needs trust, a life insurance policy can pay directly into the trust, and it does not have to go through probate or be subject to estate tax. Always review the beneficiary designation to make sure it names the trust, not the child. You should also make sure you have enough insurance to pay for your child’s care long after you are gone. If proper funding is not available, the burden of care may fall on siblings or other family members. Using a life insurance policy can guarantee future funding for the trust while keeping the parents’ estate intact for other family members. When looking for life insurance, consider a second-to-die policy. This type of policy only pays out after the second parent dies, and it has the benefit of lower premiums than regular life insurance policies.
An Achieving a Better Life Experience (ABLE) account allows people with special needs who became disabled before they turned 26 to set aside up to $15,000 a year in tax-free savings accounts without affecting their eligibility for government benefits. This money can come from the individual who has the disability, or it can also come from anyone else who may wish to give him the money.
Created by Congress in 2014 and modeled on 529 savings plans for higher education, these accounts can be used to pay for qualifying expenses of the account beneficiary. Such costs include treating the disability or for education, housing and health care, among other things. ABLE account programs have been rolling out on a state-by-state basis, but even if your state does not yet have its own program, many state programs allow out-of-state beneficiaries to open accounts. (View a directory of state programs.)
Although it may be easy to set up an ABLE account, there are many hidden pitfalls associated with spending the funds in the accounts, both for the beneficiary and for family members. Additionally, ABLE accounts cannot hold more than $100,000 without jeopardizing government benefits like Medicaid and SSI. If there are funds remaining in an ABLE account upon the death of the account beneficiary, they must be first used to reimburse the government for Medicaid benefits that were received by the beneficiary, and the remaining funds will then have to pass through probate in order to be transferred to the heirs of the beneficiary.
Get Help With Your Plan
When it comes to providing for a child with special needs, proper planning is essential. At Willis Law Group LLC, we offer completes services regarding estate planning and the best options for parents who have a child with special needs. To schedule a consultation with us, we encourage you to attend one of our free educational workshops throughout New Jersey or give our main office a call at (877) 296-2575.