Planning for Loved Ones with Disabilities

May 2020 | Estate Planning & Probate

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The U.S. Census Bureau estimates that nearly one in eight Americans lives with physical or mental disability. Many individuals with disabilities receive services and support from local, State, and Federal agencies that are “means-tested,” such as Supplemental Security Income (SSI) and Medicaid. Means-tested benefits require the individual to qualify based on, among other factors, their assets and income. Specifically, SSI and Medicaid are generally only available to individuals with less than $2,000 in assets (with the exclusion of a home, vehicle, and personal belongings) and who earn less than $783 per month in “countable income.” Due to these strict eligibility requirements, planning for these individuals in advance is essential.

For many clients, a properly-drafted special needs trust is a great way to leave your estate to a loved one with a disability while preserving eligibility for means-tested benefits. The trust can pay for things like education, health care and durable medical equipment, travel, entertainment, and technology such as a computer or mobile phone. There are a few types of special needs trusts:

First-Party Special Needs Trust

A first-party special needs trust (often called a “self-settled” trust) is funded with the individual with a disability’s own funds. This could include money from work, a settlement, or an inheritance that was left directly to the individual. With this type of trust, when the beneficiary passes away and received Medicaid services during their life, the state is required to be reimbursed – on a dollar-for-dollar basis – for their costs.

Third Party Special Needs Trust

A third-party special needs trust is designed to hold assets contributed by anybody except the individual with a disability. For example, a third-party special needs trust can hold assets from a parent, grandparent, sibling, or friend. With this type of trust, there is no requirement that Medicaid be reimbursed for services received by the individual with a disability. Often, a third-party special needs trust is drafted within the client’s will (called a “testamentary trust”). That way, there is no need to set aside funds currently, because the trust only comes into existence upon the client’s death, avoiding additional costs and administrative expenses associated with establishing an inter vivos trust.

Pooled Special Needs Trust

A “pooled” special needs trust is a special needs trust established by a non-profit organization that allows individual beneficiaries to establish their own “account” within the larger trust. Both first-party and third-party special needs trusts are available within a “pooled” trust. The benefit (or drawback, depending on client preference) is that the organization is responsible for the investment of the pooled funds. Because of that, they can make investments that may otherwise be unavailable to an individual trustee, including investments with minimum balance requirements. Locally, there are pooled trusts managed by the Arc of Washington (the Developmental Disabilities Endowment Trust Fund) for individuals who are clients of the Division of Developmental Disabilities (DDA) and by Lifetime Advocacy Plus.

Regardless of the type of trust used, a special needs trust allows clients to leave assets to loved ones without jeopardizing eligibility for critical benefits. You are encouraged to consult with an attorney familiar with special needs planning to address these issues. Please contact Steven Matyas to discuss your estate plan and how to provide for your loved ones with disabilities.