There is still a misconception out there that it is not possible to leave your special needs family member inheritance because it could interrupt them from receiving any type of government entitlement.That is no longer true.There are things now in the federal statutes and in Virginia that do provide several options allowing family to leave money for their relatives that suffer a disability.
The first option is Special Needs Trusts. There are several types to choose from. The second option, which is relatively new, is called an ABLE Account, which is actually a bank account. There are some restrictions on this, and they are a little different from the Special Needs Trust. These are the two main vehicles for leaving money to a beneficiary who has been deemed by the Social Security Administration to suffer from a disability. There are pros and cons to all the options, so it is important to understand the differences between them.
There are three types of Special Needs Trusts.
The first type is a third party Special Needs Trust. Let’s use the example of grandparents who have a grandchild that suffers from a disability and four others that don’t. These grandparents may want to put money into this type of trust because their goal is to have it go to the five grandchildren equally. If they do a will or a trust, they can put a provision in either the will or the trust that the disabled grandchild will get one fifth of whatever amount they want to give to the grandchildren. But if this does go into that third party Special Needs Trust, the importance of having the third party is they can designate any funds that remain in that trust upon their grandchild’s death.
The next type of Trust is called a Self-Led Special Needs Trust. This type can be set up by a parent or guardian or an individual under the age of 65, who suffers from a disability. With these Trusts, we would use the example of a child who is disabled because, when they were born, there was medical malpractice that caused the disability. A lawsuit provided a million dollar settlement because of negligence from medical staff. This is actually the child’s money. This individual would set up a Special Needs Trust which would be self settled. If they are not able do this themselves, their parent or legal guardian could set up that type of Special Needs Trust. However, funds remaining in the trust, upon the individual’s death, would go back to the Commonwealth of Virginia. The justification for this being the funds are going to pay for all that has been received from things like Medicaid and are going to go back and cover those expenses the individual had throughout their life. That is one of the biggest differences between a Self Settled in a third party trust.
The Self Settled is actually the disabled person’s own money received from the malpractice lawsuit and whatever is left upon their death goes to the Commonwealth of Virginia.There are examples I have seen of Trusts drawn up by attorneys who don’t seem to realize this. They set it up in a way that it should be a third party, but they designate the residual beneficiary to be the Commonwealth. And if it’s a third party Special Needs Trust, you absolutely do not want to do that. You want to have it set up whereby the funds could go to the individual’s siblings or children or whomever they designate including a non-Profit or organization instead of leaving it to the State. In this scenario, multiple family members can set up a Third Party Trust as well. There is no limit to how many Special Needs Trusts could be out there. This is not the case with an ABLE Account which we will get to shortly.
Lastly, we have what is called a Pool Trust. A Pool Trust could either be a Self Settled or a Third Party Special Needs Trust, but it’s pooled and that means a Management Company handles it. We have two in Virginia, the Commonwealth Community Trust in Richmond and the Arc of Northern Virginia in Falls Church. The Pool Trust means they have Sub Trusts under them. Money will be put into a sub account and invested and of course invested conservatively. Anytime money is needed out of the trust, a check can be written and sent and all is handled with a fee. It is a great idea to have a Pool Trust when a person doesn’t have someone to handle a Special Needs Trust.
An important distinction to note is that here is no monetary limit to the funds you can put into a Special Needs Trust.
The ABLE Account is attractive because it’s probably the easiest one to set up. You can basically go to the bank and say that you want to set one up. It does come with a few potential downfalls, depending on your situation. One of them is there is a limit to the amount of money you can have in it. The limit is $100K. The other limit is you can only have one account. So, if multiple relatives wanted to set something up for their special needs relative, only one would be able to do so. That being said, one family member could set up an ABLE Account while multiple others could set up a Special Needs Trust.
Another downfall of an Able Account is that if something happened to the special needs individual with the designated Able Account, the funds would go to the state. That is what is called a payback provision. Another area to consider in looking into an ABLE Account is that the disability must have happened before the beneficiary reached the age of 26. If you are looking for solutions for a family member who became disabled after that age, they would not be eligible for one at all.
Able Accounts are a great solution in many situations. If someone is receiving any financial support and might have over $2K in assets, they can put money into an ABLE Account and not have it interfere with their benefits. Another advantage is the investment income earned is not taxed as long as it’s distributed for the individual’s qualified expenses related to the disability. Examples of those expenses would be health, education, housing, transportation, assistive technology and personal support.
The best thing to do is to take your personal situation to someone that specializes in Elderly and Special Needs law. There are many possible scenarios, and they all demand unique solutions. And remember that a will alone will not work in the case of special needs. You want to look at your Estate Plan every five years or so to make sure that you have covered all your bases and because the laws do change, as well as, family dynamics.