by Jenny McInerney
Nine years ago, I became a stepmom to two teenage girls – Katelyn and Erin. The previous year they had experienced the trauma of losing their mother to cancer. I stepped into the role of wife and full-time stepmom without any experience. At the time, Erin had a diagnosis of ADHD and mood dysregulation disorder. A year later, I would adopt both girls and give birth to our son, Benjamin. Two more years later, Erin would be diagnosed with autism and a language impairment at the same time that our son began receiving early intervention for a speech delay (he has since also received an ASD and ADHD diagnosis). This rapid introduction into “special” motherhood not only changed my personal life, but my professional life too.
A once practicing litigator, my practice quickly became one of disability law. I began learning everything I needed to know to advocate for my daughter. I read, I studied, I took classes. I knew that in order to teach her how to live with her diagnosis, I had to learn everything I could about it (and the laws that protect the individual). The result nine years later is that I now help families just like mine walk through the process of advocacy, planning, transition, learning about benefits and gaining independence for their loved one.
This article sets forth the basics of special needs planning and how critical it is to adequately plan for your loved one. Feel free to reach out with any questions you may have about special needs trusts or ABLE accounts. Both are invaluable tools and when utilized together, are true assets to the process.
What is “Special Needs” Planning?
Special needs planning is estate planning for individuals who have a family member of any age with a disability. “Estate planning” involves determining how an individual’s assets will be preserved, managed, and distributed after death. and special needs planning just involves a type of planning that involves beneficiaries who have a disability. Because the cost of care for a person with a disability is oftentimes expensive, it is important for families to plan for of all sources of funding available for that individual’s care-both public and private. Under current Social Security and Medicaid regulations, a direct gift or inheritance of over $2,000 to a person with a disability would make the person ineligible for important “means-tested” government benefits, such as Supplemental Security Income (“SSI”) and Medicaid (which could be the person’s only source of health care insurance). For this reason, an individual with a disability who either presently receives or may qualify later for these means-tested benefits, or who may participate in educational/vocational programs available only to those eligible for government benefits, should not receive an inheritance or gift outright or in a traditional trust. Instead, the inheritance or gift should be directed to a special type of trust called a special needs trust (“SNT”). Special needs trusts do not count for eligibility purposes for means-tested government benefits programs.
Who needs Special Needs Planning?
Individuals with any type or degree of physical, mental, or developmental disability can benefit from special needs planning. Parents who have a child/children with a disability potentially affecting his or her ability to support himself or herself or obtain his or her own medical insurance are good candidates. Also, a person whose spouse or parent has developed a disability later in life should consider special needs planning to maximize sources of both public and private funding to provide a higher standard of care for a family member in need. A SNT becomes the main vehicle by which a parent can provide for a child’s (or loved one’s) future cost of living and caregiving and provide an effective way for other family members to make gifts to the child, all while keeping governments benefits available. Because current public benefit programs for persons with disabilities do not provide coverage for all basic living needs (such as dental care), it is critical to have a source of private funds to supplement these public sources.
What kinds of estate planning options are available in Special Needs Planning?
Special needs planning is tailored to each family’s goals, personal and financial situation, and life plan for their loved one. The SNT might be a separate document that could be funded during the parent’s lifetime, or it might be part of the parent’s will and established at death. Many parents of a special needs child will establish a separate SNT for the child and have a Will that directs the child’s inheritance to the SNT at the parent’s death. This kind of SNT is sometimes referred to as a “Third Party” SNT, since it is designed to only receive assets of persons other than the child. A grandparent or sibling or other family members/friends can make gifts to this trust during the parents’ lifetime. It is a common strategy of parents to designate the SNT to receive life insurance or to name the SNT as the beneficiary of investment accounts. Some parents prefer to begin funding the SNT during their lifetimes, while others only fund it only after both parents are gone.
How Does an SNT Work?
Special-needs trusts are irrevocable trusts that preserve the beneficiary’s eligibility for need-based government benefits because the trust—not the beneficiary—owns the assets. Such trusts can pay for quality-of-life expenses outside the scope of government assistance, such as education, entertainment, and travel, so long as the funds are used only for substantiated expenses not covered by government benefits. Once the trust is established, an EIN (similar to a social security number) is assigned to the trust and it can begin receiving funds/gifts. Once the first gift is complete, spending on the beneficiary can begin. It is important to note that if the beneficiary is already receiving government benefits, the trustee must notify the Social Security Administration of the new trust instrument and identify where the funds originated. This requirement is typically met by the trustee.
What can an SNT pay for?
Distributions can be made for the disabled person’s special needs, which are his/her needs which are not being met by Medicaid, SSI, or other public sources. These special needs are very broad, including transportation, rehabilitation, entertainment, education, telephone, computers, medical and dental services not otherwise provided by Medicaid. It will also provide funding for vacations, companions, pets, and other items designed to enhance the quality of the disabled person’s life. If the individual is on SSI (a maximum monthly payment of $943 at this time) and trust distributions are made for items of food or shelter, the disabled person’s monthly SSI payment will be reduced—but no more than 1/3 of the maximum monthly amount plus $20. Often the benefits provided to the beneficiary from the SNT more than justify the small reduction in the monthly SSI benefit. It is helpful to also keep in mind that while the SNT cannot directly provide funds for food and shelter, an ABLE account can. Thus, an SNT can disburse up to the annual ABLE contribution limit (in 2024 that limit is $18,000) directly into a beneficiary’s ABLE account for qualified disability expenses. By doing this, disabled individuals can use their trust and ABLE account together. By using these two tools, the individual is able to minimize fees and grow funds tax-free through ABLE investment options. It is a win-win situation.
Does an SNT have to repay Medicaid or Social Security upon the death of the beneficiary?
No, the remaining funds may be paid as directed in the trust at the beneficiary’s death-whether to the beneficiary’s descendants, siblings, charity, or a combination of these. There is a different type of SNT called a “Self-Settled” or “First Party” SNT, which can receive assets of the disabled person in excess of the $2,000 limit. It does require a payback of Medicaid proceeds expended on the beneficiary at his or her death. That type of SNT is not addressed in this article, but it is important to be aware that there are different types of special needs trusts, and some do require payback.
What Should I do to set up an SNT?
I recommend that you find a competent attorney near you well-versed in special needs planning. The preservation of family assets and access to government benefits requires specialized and detailed drafting. Maintaining government benefit eligibly throughout the lifetime of the loved one with a disability requires access to competent legal counsel who can guide you and your trustee on any SNT administration question you might have along the way. Special needs planning goes beyond traditional estate planning to combine disability law, government benefits law and even, at times, elder care, and tax law. The attorney you select will need to be familiar with all of these areas of the law, and how they may affect your particular family situation.
Feel free to contact me, Jenny McInerney, at JMcInerney@ParmerLaw.com or (205) 837-4900, with any questions regarding your loved one. As a parent to two special needs children, I understand the challenges of planning for children with “special” needs.