One of the most common goals in estate planning is to protect loved ones. How to actually do so really depends on the beneficiary’s particular circumstances and needs. A beneficiary with special needs is often a complex situation to address. The term “special needs beneficiary” refers to an individual who will likely receive needs-based government benefits in the future or is currently receiving benefits due to a disability or medical condition. Planning for a special needs beneficiary can quickly get complex due to the wall of regulations surrounding government benefits and the associated ongoing compliance. Eligibility is initially established by an asset resource test, which typically allows the benefit recipient to own no more than about $2,000 of assets and minimal income. Utmost care must be taken when planning for special needs beneficiaries because a single misstep can result in their loss of benefits.
Third Party Trust
Creating a Special Needs Trust (SNT) to maintain government benefits has been the standard practice for years. There are a variety of special needs trusts, each with their own particular nuances. In our practice, the most common SNT uses a Revocable Living Trust (RLT) to create a “Third Party Trust” (TPT) after the RLT creator’s death. With a TPT, a separate trustee will be appointed with the responsibility of managing the trust assets for the special needs beneficiary. The trust terms direct how assets can be used and most importantly, the trust assets should only be used to supplement government benefits. In most instances the role of a special needs trustee is best handled by a professional trustee that is well versed in benefit program requirements. Many other special needs trusts (like pooled trusts or certain court created trusts) require repayment to benefit programs like Medicaid for any benefits that were distributed to the beneficiary during their life. With a TPT there are no pay back requirements and subsequent beneficiaries can be designated once the initial beneficiary has passed away.
ABLE Act
In 2014 Congress passed the Achieving a Better Life Experience (ABLE) Act. Virginia adopted and passed legislation to implement the ABLE Act in 2015. In essence, the ABLE Act allows individuals to create a savings/investment account that does not count as an available resource for the individual’s need-based government benefits. Certain benefit programs can still be affected by the ABLE account and a full understanding of the benefit regulations is necessary. For example if the ABLE account exceeds $100,000, SSI benefits may be reduced. An ABLE account enrollee must have been disabled prior to reaching age 26, otherwise the program is not available to them. The specific medical conditions granting eligibility are listed on the Social Security Administration’s “Compassionate Allowances Conditions.” The ABLE account can be funded with up to $14,000
per year and have a total account value of no more than $500,000. Funding for the ABLE account can come from the account owner (benefit recipient) or from other family and friends. Any earnings generated by the ABLE account are both federal and state income tax exempt. Virginia offers a state income tax deduction of up to $2,000 per account contributor. Not only does the ABLE account have a cash savings component but assets may also be invested in one of four available portfolio options. ABLE accounts are susceptible to payback filings made by Medicaid for any benefits paid out during the beneficiary’s lifetime. This is a disadvantage as compared to a Revocable Trust created TPT which is not susceptible to payback provisions.
In essence, the ABLE account is a very good planning option for those without the desire or resources to create a TPT under a Revocable Living Trust, and/or it may be used in combination with a TPT. The ABLE account also really shines as a low-cost option for family members to provide smaller gifts for a loved one. For further details on the ABLE account please go to https://www.able-now.com. At Johnson, Gasink & Baxter, LLP, we happily help families protect their loved ones using Special Needs Trusts and discuss the use of other planning tools such as the ABLE account.