Special Needs Trusts
A special needs trust (SNT) allows families to save significant assets for a special needs, disabled, or elderly person who receives Medicaid, Social Security Income (SSI), or other “means tested” (has strict beneficiary asset or income limits) government benefits. Federal law makes SNT assets “noncountable” (counted as zero dollars) with respect to the beneficiary’s monthly asset limit (typically set at $2,000 for a single Medicaid or SSI beneficiary.) SNT funds may pay for a variety of goods or services that supplement government payments, while allowing the special needs or disabled beneficiary to keep their government benefits.
An SNT may pay for:
- Medical, psychological, or dental treatment;
- Private rehabilitation;
- Educational training;
- Home care;
- Personal care and living expenses;
- Medical equipment;
- Food supplements;
- Automobile or van expenses; adaptive modification expenses;
- Adaptive equipment;
- Enrichment items and activities;
- Electronic devices, radios, televisions, audio, video, and computer equipment;
- Recreational opportunities, trips, family visits, visits to friends;
- Health insurance premiums and deductibles;
- Life insurance premiums;
- Purchase and maintenance of a primary residence for the elderly, special needs, or disabled individual
Enacted in 2014, the federal Stephen Beck, Jr., Achieving a Better Life Experience Act (ABLE Act), allowed states to set up programs to create tax free savings accounts owned by special needs or disabled individuals, that do not disrupt their government benefits. Learn more about the North Carolina ABLE account program here. A special needs or disabled person may manage their own account, or the account may be managed by a parent, legal guardian, or power of attorney agent. Although an ABLE account may be established at any time, the account owner and beneficiary must have become blind or disabled by a condition that began before the individual’s 26th birthday.
ABLE account funds may be used to pay for qualified disability expenses (QDEs), such as expenses for:
- Housing (includes mortgage and required property insurance expenses, real property taxes, rent, heating fuel, gas, electricity, water, sewer, and garbage removal)
- Employment training and support
- Assistive technology and related services
- Personal support services
- Prevention and wellness
- Financial management and administrative services
- Legal fees
- Expenses for ABLE account oversight and monitoring
- Funeral and burial
- Basic living expenses (includes food)
Special Needs Trusts and ABLE Accounts: Differences, Advantages, and Limitations
Even though SNT and ABLE account assets may be used for a number of overlapping purposes, SNTs and ABLE accounts were originally authorized under different federal laws. Depending on the need, either an SNT or an ABLE account may provide a better solution. In many cases, an SNT and an ABLE account can be set up to work together, so that an SNT trustee may be authorized to direct SNT funds into the SNT beneficiary’s ABLE account.
Different types of special needs trusts are available for different purposes. A third party SNT is normally set up by a parent, grandparent, or other caring person with the giver’s own assets, to either provide funds to a special needs or disabled beneficiary right away, or at the giver’s death (testamentary third party SNT.) Using a third-party SNT in advance estate planning can better keep assets within the family, and keep those assets protected from outsiders or creditors.
A first party SNT (such as a “d4A” SNT) may be set up to make a beneficiary’s assets noncountable when those assets are owned by, or titled to, the beneficiary. First party SNTs are frequently set up to make a Medicaid or SSI beneficiary’s inheritance (if that inheritance is not held within a 3rd party SNT set up by the giver), or asset award noncountable, so that the beneficiary’s Medicaid or SSI benefits are not disrupted.
Because a first party SNT must adhere to a strict federal “sole benefit” rule, the trustee of a first party SNT should not fund an ABLE account with first party SNT assets. 3rd party SNTs, which do not have to comply with the sole benefit rule, provide the trustee with more spending options. A third party SNT may thus fund an ABLE account, and keep the ABLE account funded. The rest of this article will thus refer only to 3rd party SNTs.
3rd Party Special Needs Trust Advantages
- No age limits – may be set up for a special needs or disabled individual of any age
- No total funding limit – may hold any amount of assets
- No annual funding limit – assets may be placed in the trust at any time, in any amount, without a yearly maximum limit
- May hold a wide variety of asset types, including real property such as a home, and motor vehicles
- No government payback requirement – if the beneficiary passes away, remaining SNT assets may be directed to other family members
3rd Party Special Needs Trust Limitations
- The SNT beneficiary may not serve as trustee or manage SNT funds
- Spending SNT funds on In Kind Support and Maintenance (ISM) expenses for SSI beneficiaries, such as for food expenses, or housing support expenses, may lead to lower monthly SSI benefits
- The trust grantor will need to pay legal fees in order for SNT documents to be drafted properly
ABLE Account Advantages
- A special needs or disabled person who is mentally competent may create an ABLE account, and manage his or her own assets
- An ABLE account may pay for food or housing expenses
- Very inexpensive to set up; may be appropriate for small amounts of assets
- May be used to shield extra assets such as gifts, personal receipts, or work salary when the beneficiary’s personal checking account nears its $2,000 countable asset limit
- A parent, legal guardian, or power of attorney agent may be authorized to manage an ABLE account when needed
ABLE Account Limitations
- The account applicant’s onset of disability must have occurred prior to age 26, with the applicant having significant functional limitations resulting from the disabling condition
- Annual contributions are limited to the individual annual gift tax exclusion amount ($15,000 in 2021)
- A maximum of $450,000 may be held in the account
- Account funds are subject to Medicaid or other government payback if the account owner/beneficiary passes away with account funds remaining
Using a 3rd Party SNT with an ABLE Account
A special needs or disabled person may remain more independent and happy when that individual can save money, and manage his or her own assets (when mentally able to manage assets.) In contrast, federal law requires that a trustee who is not the beneficiary serve as the manager of SNT funds.
But a 3rd party SNT may be drafted to allow the SNT trustee to fund, and keep funded, a separate ABLE account owned and managed by the special needs or disabled beneficiary. This can provide the beneficiary with funds for food, housing, or other important expenses, that the beneficiary can manage and spend independently.
An Integrated Approach (1)
When a 3rd party SNT is set up to fund an ABLE account, three sources of funds will now be available to pay a Medicaid or SSI benefits recipient’s expenses: 1) the beneficiary’s primary personal checking account; 2) the beneficiary’s ABLE account; 3) the SNT account.
All three accounts may be used together in the following manner:
Personal checking ($2,000 Medicaid or SSI asset limit – less if other countable assets are available): Receives SSI payments and work earnings
- Used for paying rent, mortgage, meals, groceries, utilities, and for cash needs
ABLE account ($15,000 yearly contribution maximum): Receives funds from the SNT trustee, receives funds from personal checking when the personal checking account nears its $2,000 limit, receives gifts or other personal payments
- May be used for any qualified disability expense (see above), such as for transportation, assistive technology, employment support, housing expenses, or food
3rd Party SNT: Receives larger gifts and inheritances
- May purchase a home residence or automobile for beneficiary; pays for larger expenses including unreimbursed health-related expenses, vacations, insurance, and other large expenses
(1) Ryan McGuire, How Special Needs Trusts and ABLE Accounts Work Together (April 29, 2019).