Heirs with special needs require special planning.
You are preparing your estate plan.
Your hope is that your estate will bless your heirs and their futures.
However, what if you have a loved one with special needs?
You should think twice before leaving an outright inheritance.
According to a recent Kiplinger article titled “How to Keep Your Estate Plan from Jeopardizing a Disabled Heir’s Benefits,” doing so can lead to significant problems for your loved one.
Individuals with cognitive or physical disabilities often qualify for public assistance or private benefits.
Such benefits can provide support for living expenses and other needs for your loved one.
Certain government benefits like Supplemental Security Income (SSI) are means-tested.
As a result, your family member would be disqualified if he or she directly received a sum in excess of the means-tested limits.
To qualify for the benefits again, your loved one would likely need to reapply for the funding after spending down the inherited assets.
Does this mean family members with special needs should be disinherited?
Not at all!
You have several options available to provide inheritances to loved ones with special needs.
What are these?
The first is to use a Special Needs Trust.
These are third party-trusts funded with your assets as the trust creator.
They can also be first-party trusts where the parent, grandparent, guardian, or court sets up the trust and funds it using the assets of the beneficiary.
With a first-party Special Needs Trust, the provider of state benefits must be reimbursed for the lifetime benefits paid to the beneficiary upon his or her death.
Any amount remaining after reimbursement may pass to other family members or other beneficiaries.
With a third-party Special Needs Trust, the funds “supplement” rather then replace the public benefits for those with disabilities.
Whatever remains in the third-party Special Needs Trust will pass to family members or other beneficiaries when the beneficiary with special needs dies.
The second tool available for estate planning is an ABLE account.
ABLE accounts are savings accounts and have similar tax advantages as 529 education savings accounts.
The money held in these accounts cannot exceed certain limits, but the funds are also not counted as available resources for means-tested benefits.
A third option for planning for heirs with disabilities is a pooled trust.
Unlike a Special Needs Trust, the trust is not solely for the benefit of the individual with special needs.
The pooled trust is overseen by a nonprofit organization and the funds are combined with a master trust for investing and managing.
Each beneficiary will then have a sub-account created.
The beneficiary with special needs will receive a proportionate share of earnings from the entire fund and distributions may be used for the authorized needs of the beneficiary.
If you have a loved one with special needs, you should work with an experienced estate planning attorney to create a plan to meet your goals without triggering problems for your loved one.
Reference: Kiplinger (Feb. 9, 2022) “How to Keep Your Estate Plan from Jeopardizing a Disabled Heir’s Benefits”