Estate planning is not a requirement. No one can force you to make your will, create a power of attorney or to own your property in a way to avoid probate. As a result, people too often let common estate planning excuses stand in their way.
For those who fail to plan, states have default laws for managing the transfer of their property and assets at death or for controlling their property if they lose this ability because they’re critically injured or at an advanced age.
However, these laws should be viewed as a backup plan, not an ideal arrangement — especially if you have a family member with a disability. By relying solely on the default laws in the probate or guardianship code of your state without considering your heirs’ current or potential eligibility for certain benefits, you might unintentionally disqualify your disabled child or grandchild from receiving public benefits, or these benefits may be substantially reduced. Thoughtful planning on your part can create additional benefits for your heirs by preserving resources made available through private or public sources.
A person with a physical or cognitive disability may qualify for taxpayer-sponsored public benefits or privately funded benefits to support his or her living expenses, since he or she may be unable to work or to gain full employment due to a disability. These public benefits, called Supplemental Security Income (SSI) are “means tested,” meaning that to apply (or re-apply) for them, a person must utilize, or “spend down,” most of their savings or funds that are available without restriction.
Grandpa’s problematic old estate plan
I was recently introduced to a widower who has five grandchildren. His grandson suffered a severe head injury and compound fractures to his leg in an automobile accident when he was 16. He will have difficulty with fine motor skills for the remainder of this life and can’t stand for extended periods. He is now 22 and qualifies for SSI to supplement his earned income. His grandparents had a typical estate plan created before the accident. It provided that at the death of the first spouse, the balance of that person’s estate would pass to the surviving spouse. Upon the surviving spouse’s death, the balance of the remaining joint estate would be divided, leaving shares directly to their surviving children and grandchildren.
This plan would have caused an unintended consequence for this grandfather’s disabled grandson. Since his grandson would receive this inheritance directly, the Department of Human Services in his state would have considered his inheritance an available resource, disqualifying him from continuing to receive full governmental benefits, including Medicaid health insurance, until these funds were fully used. His problems would have been compounded if his father wasn’t living at his grandfather’s death, because he would have also been entitled to the share set aside for his father.
Thankfully, the grandfather updated his estate plan (described in detail below). Had he not, it still would have been possible for his grandson to continue receiving public benefits, but this would have required the state to be reimbursed for the benefits paid during his lifetime before any remaining funds could be distributed to other family members. The grandfather was resolute in his decision to change his estate plan when he became aware of the likelihood that the state would be paid a portion, if not all, of his legacy.
How supplemental needs trusts work
After collaborating with an estate planning attorney experienced in the complicated arena of public benefits planning, we explained to the grandfather that funds can be held in a trust that won’t reduce his grandson’s present benefits or disqualify him or other heirs from future benefits. These trusts are known as supplemental needs trusts or special needs trusts (SNT).
An SNT can be either a first-party trust created by a parent, grandparent, guardian or a court using the beneficiary’s own funds or a third-party trust funded with assets belonging to the trust’s creator. Because the beneficiary’s assets are used, a first-party SNT requires that the state benefits provider be reimbursed for lifetime benefits paid by it on behalf of the beneficiary. A first-party SNT could have been created by the court had the grandfather not changed his original plan, but state reimbursement would have been required.
The grandfather’s new plan created a third-party SNT for the primary benefit of his grandson that will supplement, but not supplant, his public benefits. Upon his grandson’s death, the remaining balance of the trust will be distributed to his grandson’s descendants or his other grandchildren.
Since the trust is funded with the grandfather’s money, and not his grandson’s, there is no need to reimburse any state for public benefits received. The grandfather also made similar provisions for any of his other children or grandchildren who are not presently receiving public benefits but may qualify in the future.
Alternatives to special needs trusts
Special needs trusts are one of several solutions that can be used to plan for descendants who currently receive disability benefits or may in the future. Choosing an experienced trustee to oversee a special needs trust for his grandson’s benefit was a good solution for this client, based upon the overall size of his estate and the nature of his assets. Under different circumstances, he may have considered other alternatives, such as an ABLE account, a pooled trust or purchasing exempt resources (such as a car or house) for his grandson.
ABLE accounts were created with the passage of the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014. An ABLE account is a savings accounts for individuals with disabilities. They are like 529 education savings accounts with similar tax advantages. There is a limited amount that can be held in an ABLE account, but up to $100,000 of the balance will not be considered an available resource for Social Security and other government benefits (Medicaid eligibility is not affected by those limits).
The maximum amount that can be contributed to an ABLE account annually is set by the federal government and is adjusted for inflation each year. In 2022 this amount was increased to $16,000. The balance held in ABLE accounts can increase from year to year as long as it doesn’t exceed the maximum amount permitted in the state where the disabled person resides. This limit currently ranges from $235,000 to $550,000, with many states allowing more than $500,000 to be held in an ABLE account.
A pooled trust can be a first-party or third-party special needs trust. This type of trust is managed by a nonprofit organization and is often a cost-effective solution, because the funds of many beneficiaries are combined into one master trust for administrative and investment purposes. Sub-accounts are then created for each beneficiary, with the disabled person’s account receiving a proportionate share of the entire fund’s earnings.
Distributions may be made by the nonprofit trustee from the beneficiary’s share and used for his needs. One important thing to note: Pooled trust providers typically can’t hold a house for a disabled beneficiary, unlike a trust created for a single beneficiary.
Purchasing exempt resources
When determining a disabled person’s resources in calculating his or her benefits, the value of personal property and household goods, one automobile and a home occupied by the person will not be counted. Purchasing exempt resources, such as an automobile or residence, can be an effective strategy for some people, particularly when combined with a pooled trust or ABLE account.
It is a good idea for everyone to review their estate plan from time to time, particularly because beneficiaries’ personal circumstances can change or there might be developments in state laws that could be advantageous to them or their beneficiaries. The time you take to carefully plan with a qualified estate and benefits planning attorney can improve your beneficiaries’ quality of life and provide additional public resources for a disabled child, grandchild or other family member.
Jim Ferraro is a vice president and trust counsel in the Shreveport, La., office of Argent Trust Company. Ferraro is a 2003 graduate of the University of Missouri at Kansas City School of Law, past president of the family and the law section of the Kansas City Metropolitan Bar Association, and is a member of the Tax and Estate Planning Council of Shreveport.