Special needs planning is important for families with children who have special needs by virtue of a physical or developmental disability. The qualifier is that the child is either currently eligible for, or with some expected progression in their disability, will likely be eligible in the future for, government means-tested benefits – normally Supplemental Security Income (SSI) and Medicaid. Eligibility for these benefits is both disability- and asset-based, meaning there is a specific asset value threshold that the beneficiary must fall below in order to qualify for such benefits. That threshold is $2,000 in assets. Not a high bar.
Unless you are prepared to leave the beneficiary an inheritance that is significant enough to sustain their financial and medical needs for the rest of their life (and even then, someone may be needed to administer it), there would need to be a thorough plan in place to best support their needs and appoint a Trustee to be responsible for the financial management of the assets.
Special Needs Planning normally comes in two varieties: 1) ABLE Accounts; and 2) Special Needs Trusts. These are meant for families without a significant estate who want to provide for a child with disabilities but 1) will pass on more than $2,000, and 2) want to maintain the child’s government benefits. So, which avenue is right for your family? It depends. Here is an analysis as to the pros and cons of each.
ABLE Accounts are a recent development of federal law that allows an individual with government benefits to set up a 529 account to hold liquid assets to supplement their government benefits, rather than supplant them. There is a $100,000 cap on the value of the account, as well as a $14,000 annual contribution cap. The assets grow tax-free, much like a standard 529 college savings account, but the funds can only be used to pay for limited expenses that are not provided for by other government benefits like food stamps, community assistance, HUD and Section 8 assistance, SSI, and Medicaid, among others.
They are easy to set up with little or no cost – generally opening an account is as easy as going to a participating bank or foundation, much like a 529 college savings plan. The MAJOR issues with ABLE accounts are two-fold: 1) the $100,000 cap – and $14,000 annual contribution cap – weed out many families from the outset, those who will leave behind more than $100,000 but much less than what would be needed to private-pay for the child’s needs for the rest of their life; and 2) whatever is left in the account after the child passes away has to be paid to Medicaid – so there is no option for a legacy or remainder benefit for these funds to go to other beneficiaries of your choice. Once they’re funded, they are required to be used for expenses or to reimburse Medicaid. End of story.
Special Needs Trusts are versatile and much more robust planning strategies than ABLE Accounts. They are created by lawyers but set up either by a parent or the court (Third-Party Trusts) or the disabled individual (First-Party Trusts). The difference is significant.
Third-Party Trusts do not have to pay Medicaid back after the beneficiary passes. They can leave the remainder of the Trust assets to another designated family member or a charity, whichever the creator of the Trust chooses. This can be very helpful when the prognosis and life expectancy of a disabled child is unknown and the parents leave a significant sum to the child. Whatever is left can go to other siblings or another worthy cause. First-Part Trusts must reimburse Medicaid for any amounts paid on behalf of the beneficiary. So, if the value of the trust after the child passes is less than the Medicaid Enforcement lien, Medicaid will get it all.
Trusts can receive more than just cash – they can hold real estate, certificated securities, brokerage accounts, tangible personal property, gold, etc. There is also no cap on the value of a Special Needs Trust, either. A Trustee is appointed to manage and administer the Trust on behalf of and for the benefit of the beneficiary in a fiduciary capacity – meaning they have a heightened legal duty to do what’s in the beneficiary’s best interests. There are, however, a couple of downsides to Trusts: 1) they can be somewhat expensive and involved to set up; and 2) the Trust income will have a high tax rate – this is because irrevocable trust income is taxed at the highest personal income tax level, currently about 39%. If you don’t have income producing assets in the trust, then it’s not really an issue, but aggressive investment strategies may be undercut by this tax liability issue. The principal of the Trust is not subject to that tax rate, just the income it produces.
Long story short – there is no one-size-fits-all planning strategy for families with children with disabilities. It requires a thorough review of your financial and family status and your wishes/fears/intentions. Always consult an experienced lawyer before moving forward with either of these strategies, because once miss-step along the way could be devastating for your child.
Best,
Paul Yokabitus
P.S.: If you’re interested in sitting down and discussing your options for special needs planning, and developing a plan tailored to your family and your needs, click here to get the process started.
P.P.S.: I’m having a Special Needs Planning seminar in Apex, NC on March 7, 2017 at 5pm. If you’re interested in learning more or attending, click here.
Paul Yokabitus is the CEO and Managing Partner of Cary Estate Planning, a Cary, NC, estate planning law firm. With years of experience in estate and elder law, he has zealously represented clients in various legal matters, including estate planning, guardianship, Medicaid planning, estate administration, and other cases.
Paul received his Juris Doctor from the Campbell University School of Law and is a North Carolina Bar Association member. He has received numerous accolades for his work, including being named among the “Best Attorney in Cary” in 2016 and 2017 by Cary News and Rising Star in 2020-2023 by Super Lawyers.