Preparing an intentional plan for beneficiaries is essential for several reasons. First, careful planning protects vulnerable beneficiaries from people who may try to take advantage of them when they receive an inheritance, according to the article “Be proactive if considering special needs” from The News-Enterprise.
Second, planning is almost always necessary to protect government benefits the beneficiary is receiving, which could be at risk if they receive an inheritance. Third, proactive special needs planning is needed to make decisions in advance about living situations, guardians if required and who will control the beneficiary’s assets.
The two most common types of Special Needs Trusts are the First Party and Third Party trusts.
First-Party Special Needs Trusts are used when the recipient of public benefits receives money that would make them ineligible for public benefits. This usually occurs because of a legal settlement or an inheritance.
This type of trust is funded with assets in the beneficiary’s own name, and the requirements are strict. The trust must be irrevocable, funded entirely with the beneficiary’s own assets. It must be set up by a parent, grandparent, legal guardian, or the court, except for some physically disabled beneficiaries.
There is an age limit for First Party Special Needs Trusts. The beneficiary must be under 65 when the trust is established, and the trust must include a provision that the state will be repaid first for money paid out on behalf of the beneficiary.
This provision allows the trust assets to be stretched to supplement the beneficiary's needs without losing public benefits. Whatever assets are left in the trust may end up with the state on the beneficiary's death.
The First Party trust is a good emergency plan. However, it’s not a great primary planning instrument for every Special Needs family.
Third-Party Special Needs Trusts are created proactively, allowing for greater flexibility and asset protection. They can be revocable or irrevocable, act as a standalone trust, or be part of a last will and testament and do not need to contain a payback provision to the state.
Another option for giving assets to beneficiaries is an ABLE account, similar to college savings accounts but designed for Special Needs individuals. They allow for simplified spending categorization and, in some states, offer a debit card the beneficiary can use, which allows limited spending.
There are limits to how much can be deposited into an ABLE account, and there is a payback provision to the state upon the account owner's death.
An experienced estate planning attorney can help create an intentional and proactive plan to ensure the best result for beneficiaries and their families.
Reference: The News-Enterprise (Oct. 14, 2023) “Be proactive if considering special needs”
