With proactive planning, we can make a bigger impact with our money and our time.
When a client comes to you and you learn they have a child or other family member with a disability, one of the first questions we should be asking is: What is the plan for this individual’s future, and how do we establish a plan now to help secure their long-term health and wellbeing?
For any individual receiving means-tested benefits through federal Medicaid or other state programs, a special needs trust (SNT) and/or an ABLE account (a tax-advantaged savings account for individuals with disabilities and their families) should be part of the conversation.
As an attorney who has worked with families impacted by disability for more than 10 years, and as an individual who has been part of the disability family community for much longer than that, it is one of my great passions to ask these questions early to be proactive in planning for a family member with disabilities. This article will walk you through two types of special needs trusts available and briefly cover how ABLE accounts can also be part of that conversation around future planning.
What is the Need for a Special Needs Trust (SNT)?
One often overlooked purpose of SNTs is the management of assets for an individual with a disabling condition. A trust is a way to dictate how money left to an individual with disabilities should be spent during their lifetime. It also allows for preserving assets from judgments arising from legal actions against the beneficiary of the trust.
However, when we typically think of SNTs, we think of the preservation of means-tested benefits by creating an exempt resource. The resource limit for Medicaid programming is $2,000 in countable assets. As any reasonable person can understand, $2,000 falls far short of an individual’s monthly needs, and supplemental assets will likely be needed to provide for living expenses. A Special Needs Trust is also referred to as a Supplemental Needs Trust because it specifically provides for supplemental funding over and above what is otherwise provided by means-tested benefits. An SNT is an exempt resource and therefore does not count against that $2,000 limit when it is drafted and administered properly.
There are two types of SNTs that can be set up and managed privately:
First-Party Special Needs Trust
A First-Party SNT is a Trust that is established with the assets of an individual with a disability. That individual may have received funds by way of a settlement, an inheritance, or money that they had at the time of their disability. A First-Party SNT has specific rules that must be adhered to for that trust to be considered a qualified SNT:
o Restrictions on expenditures are restricted to the “extra and supplemental needs” of the beneficiary.
o Beneficiary must be disabled and under the age of 65 at the time of creation
(can’t add anything after 65).
o There is a Medicaid pay-back provision.
o The trust is created by a parent, grandparent, guardian, court, or beneficiary.
o The beneficiary is the sole beneficiary of the trust.
o Discretionary Trustee powers - the beneficiary has no power to demand money
from the trust.
o The trust is irrevocable.
Third-Party Special Needs Trust
A Third-Party SNT is a trust that is created with assets that do not belong to the beneficiary. This type of trust has some of the same restrictions as the First-Party SNT, but a key difference is that the Third-Party SNT does not have a Medicaid pay-back provision requirement.
A key difference is that the Third-Party SNT does not have a Medicaid pay-back provision requirement.
When there is no Medicaid pay-back provision, the creator of the trust can dictate where that money will go after the beneficiary dies. Many of my clients choose to name a charity that has greatly impacted their family, such as Seattle Children’s.
What is an ABLE account?
The Achieving Better Life Experience (ABLE) Act amended Section 529 of the Internal Revenue Service Code of 1986 to create tax-free savings accounts for individuals with disabilities. An ABLE account is a type of tax-advantaged account that an eligible individual can use to save funds for the disability-related expenses of the account’s designated beneficiary, who must be blind or disabled by a condition that began before the individual’s 26th birthday.
Annual contributions to the account are limited to $17,000 and the total amount in the account is limited to $100,000. In the event that an individual works, the ABLE to Work Act allows beneficiaries who are employed to contribute an amount equal to their current year’s gross income (up to a maximum of $13,590 in 2023) each year to their ABLE accounts in addition to the annual standard contribution limit of $17,000.
In the event that a 529 plan had previously been set up for the individual, that account can be rolled over into an ABLE account for the same individual with no tax or penalty. The amount of the rollover is still subject to the annual contribution limit of $17,000.
Funds may only be used for Qualified Disability Expenses (QDEs). QDEs are expenses that relate to the designated beneficiary’s blindness or disability and are for the benefit of that designated beneficiary in maintaining or improving their health, independence, or quality of life. QDEs are defined very broadly and do not need to be medically necessary. The critical difference in contrast to an SNT is that ABLE resources can be used to pay for housing and groceries. ABLE accounts are also subject to the Medicaid pay-back provision, similar to a First-Party SNT.
Does the ABLE account replace Special Needs Trusts?
ABLE accounts do not replace special needs trusts, but there are times when an ABLE account or SNT may be more appropriate.
o Example 1: Austin was on Supplemental Security Income (SSI) until he got a job at the courthouse doing office administrative work. He has worked hard and receives $1,385 in wages each month (with the assistance of a job coach) and $264 in SSI each month ($85 are exempt from SSI reduction, and then half of what is remaining ($650) is subtracted from the SSI total ($914) to calculate what Austin should be receiving in SSI ($264)). His total of $1,649/month is very close to the $2,000 limit that he needs to remain under not just for the SSI but also, and more importantly, for his job coach and long-term care benefits. Austin could establish an SNT, but it might make more sense for him to forgo the expense of setting up an SNT and set up an ABLE account instead.
o Example 2: Jane has Down syndrome and receives SSI and does not work. Jane was in a car accident and her portion of the settlement from that accident is $200,000. Jane can’t put all the money into an ABLE account for a number of reasons. It is more than the $17,000 maximum annual contribution and $200,000 is more than the maximum amount that the account can hold in Washington ($100,000). I would recommend that Jane either deposit the entire amount into an SNT or contribute the majority to the SNT and then deposit some of the settlement into an ABLE account.
o Example 3: Steven is an individual with cerebral palsy and intellectual disabilities. He is 20 years old and receives SSI. Steven’s paternal grandparents give $5,000 to each of their grandchildren every year for their birthday, but they haven’t been giving that to Steven because they are worried about negatively impacting his benefits. They would also like to leave Steven a portion of their estate when they die. In this case, either the ABLE account or the SNT could be a good option, but an SNT is advisable. The grandparents could contribute $5,000 each year to the ABLE account and that still leaves plenty left in the annual maximum of $17,000 for Steven or others to contribute. However, the ABLE account has a Medicaid pay-back provision. A Third-Party SNT does not have such a requirement, so it is advisable. This Third-Party SNT can also be referenced in the grandparents’ wills, and the inheritance would go directly to the SNT. Doing so ensures that even if Steven’s share is over the annual maximum for the ABLE account he would still be able to receive the entire amount without a negative impact on his benefits. If the client wants to have an ABLE account as well, a provision can be added to the trust to provide for distributions to an ABLE account. Additionally, the grandparents can designate a charity as the remainder beneficiary for the trust after Steven’s death.
As Seattle Children’s Legacy Advisors, each of us has a unique opportunity to educate and inspire individuals to make a meaningful impact for years to come. I’m grateful to be working together on our shared goal of helping kids and families in our community. If you’d like to learn more, please reach out to me at katie@feeneylaw.net. I’m always happy to be a resource.
About the Author:
Katie Hurt is an Attorney at Feeney Law Office, PLLC. The firm is located in Richland, Washington, but Katie works at their satellite office in Issaquah. Her interest in advocacy began when her brother was diagnosed with autism as a child. She chose to pursue a career in the legal profession to better meet the more complex needs of families like hers. Katie earned her Juris Doctorate Cum Laude from Seattle University School of Law and a Bachelor of Arts in Economics and Political Science from the University of Washington. She serves on the Seattle Children’s Legacy Council. Katie Hurt has been named a Super Lawyer Rising Star every year since 2018.
