Part of planning your estate involves organizing your assets and deciding how you will distribute them to your chosen beneficiaries. Sometimes this can be as straightforward as naming a beneficiary in your will, but in some cases it may take more careful planning.
If you have a loved one with special needs, you may consider providing for them with an ABLE account or a special needs (supplementary) trust.
What is a special needs trust?
Special needs trusts enable those with a disability to receive financial support without losing their government benefits. Because Medicaid and some other government programs require a means test, many people can lose their eligibility if they inherit money. A special needs trust can allow them to have a source of income that does not damage their eligibility.
The two types of special needs trusts are:
- Third party: Funded by someone other than the beneficiary, these trusts can be created for individuals other than those with disabilities.
Two ways to set up this trust include:
- Stand-alone: Used to financial support loved ones during creator’s lifetime, this trust is not part of a will or trust. Beneficiaries can access funds before creator’s death.
- Testamentary trust: Used if leaving the trust as an inheritance. Beneficiaries cannot access the funds prior to creator’s death. The trust contains no funds prior to death.
- First party: Funded with the beneficiary’s own assets, this trust serves those with functional needs. The beneficiary must have a disability, be under 65 when trust is established, and must be revocable. They must include a Medicaid repayment provision.
- Pooled trusts: Must be set up and managed by a non-profit organization that acts as trustee. These can be either first-party or third-party trusts.
What is an ABLE account?
Pennsylvania offers ABLE accounts as another estate planning option for eligible individuals to save for disability-related expenses without taxation. Provisions regulating these accounts include:
- Contributions: Limits exist on annual contributions and total amount, but the contributions are deductible from state tax.
- Investment options: Seven available depending upon risk.
- Account control: Eligible Individuals must have Authorized Individual manage it. For those unable, a list of Authorized Individuals exists.
Families with special needs members or those whom they believe may need guidance and assistance later in life have tools available. Depending upon the specific circumstances, a special needs trust or ABLE account can help alleviate worry. Attorneys who understand how and when to use these tools can help.