charitable contribution deductions from an estate

Planning Is Different for a Child with Special Needs

December 16, 2020

Parents and grandparents do all they can to help their children and grandchildren lead their best lives, and that often extends to the child or grandchild’s adult lives. When estate plans are made, people who can afford to, leave money and property to continue to support loved ones. However, planning is different for a child with special needs, explains the article “Planning for loved ones with special needs” from The Sentinel. The child may have been born with a developmental disability or a motor disability or developed mental illness or an addiction.

A person who is not able to work or care for themselves often receives public benefits to pay for food, shelter and medical care. Those public benefits will be jeopardized, if parents or grandparents make the mistake of leaving a gift of money or a bequest. Special needs planning addresses this issue.

Public benefits for people with no assets or income include Supplemental Security Income (SSI) to pay for food and shelter, Medicaid for medical care and the SNAP program for food, among others. Before money is given to a disabled family member or left in an estate plan, a review of the public benefits that are in use or available needs to be done, so benefits are not disrupted.

One example is SSI, a federal program that supports disabled persons who cannot earn enough, which in 2020 means $1,260 or more in a month. A disabled person who earns less than that and owns less than $2,000 in assets can receive $783 monthly to pay for food and shelter. If the person owns the home they live in or owns one car, they may still be considered to have under $2,000 in assets. Clothing and personal belongings are also not counted against the $2,000 asset limit.

However, to continue receiving the full benefit amount, the person cannot receive money from family or friends, since that money could be used for food and shelter. This also applies to “in kind” gifts, such as making a mortgage payment or helping with utility bills. Any direct gift reduces the SSI benefit.

There are ways for parents and grandparents to help their loved one enjoy a better quality of life. However, gifts must be carefully planned and within the laws. For instance, a family member may purchase certain services for a disabled person that would not disrupt their benefits. A parent or grandparent could pay for auto repairs, cell phone and land line phone services, educational expenses, medical care and social services. One very important note: the payments must be made directly to the merchant or provider and not to the disabled person.

There are two primary tools used to consider, when planning for a child with special needs or disabled person:

Special Needs Trust: The gift is placed in the control of a trustee who manages the money, invests it, makes the appropriate tax filing and makes the decision about when to distribute funds.

Most family members don’t understand the web of complex regulations that dictate how public benefits work. Properly created and managed by a responsible trustee, the Special Needs Trust avoids putting the burden of financial care on other family members and lets money be wisely distributed.

Money and property in a Special Needs Trust is not considered to be an asset of the individual, as it is owned by the trust. However, the same restrictions apply to making direct distributions from the trust to the individual beneficiary for food and shelter.

The other account is an ABLE account, created by the Achieving a Better Life Experience law. Anyone can contribute to it and money in the account is not considered income and not counted against the asset limitations. Contributions are currently capped at $15,000 per year, and the account cannot contain more than $100,000.

Distributions from the ABLE account can be used to pay for a wide array of expenses for a disabled person without impacting government benefits. That includes housing, transportation, assistive technology, health, education and other needs. Families need to be aware that the disabled individual owns the assets in the ABLE account. If they are unable to manage money or are susceptible to scams, the family will want to be cautious about putting funds into the account.

If you would like to learn more about planning for a child with special needs, please visit our previous posts.

Reference: The Sentinel (Nov. 20, 2020) “Planning for loved ones with special needs”

Different Types of Special Needs Trusts

November 17, 2020

The most frequently used tool to protect and care for children with special needs after both parents has passed is a special needs trust, says Forbes in its article entitled “Making Trusts for Special Needs Children.” A special needs trust is a legal instrument used to provide benefits to an individual with special needs, while also maintaining that person’s ability to receive state or federal benefits assistance. The trust is usually created by a parent or guardian, with the special needs child as the beneficiary. It is important to understand the different types of special needs trusts.

A third-party trustee is often appointed. That person or institution has authority to make disbursements from the assets in the trust on behalf of the beneficiary. This trust lets parents make sure that their child with special needs has his or her needs met after the parents pass away.

Some government benefits used by a person with special needs—such as Supplemental Security Income (SSI) and Medicaid are “means tested.” That means they are only available to those who themselves have limited income or assets. If a parent wants to provide support to a child with special needs after the parent’s death, those assets must pass correctly to ensure that the assets don’t cause that child to directly own the assets and thereby lose their government eligibility for the benefits.

Again, any assets left directly to the beneficiary without use of a trust could disrupt the beneficiary’s receipt of benefits, taking money and support away from the beneficiary.

What are the differnt types of special needs trusts? The most common special needs trust is a third-party special needs trust. This trust is funded by family members of the beneficiary to make certain that there are specific assets set aside for the beneficiary’s utility bills, education, entertainment, or most other regular expenses.

There are also first-party trusts, where the trust is established with the assets owned directly by the child with special needs. This can result when the child with special needs receives an inheritance, life insurance payout, or personal injury settlement directly, which may impact their existing benefits.

There are also pooled trusts, which are trusts that are managed by a nonprofit organization. With a pooled trust, the grantor doesn’t have to name a trustee, especially one who may not have experience in managing trust assets. Consequently, the assets are held for the benefit of the child with special needs, but they are managed by an organization with expertise in doing just that.

An ABLE account is another option. They’re not trusts, but they allow up to $15,000 a year to be earmarked for the benefit of a person with special needs. The distribution rules are similar to those of a special needs trust.

It can be difficult to understand the different types of special needs trusts. There is significant complexity with the laws surrounding special needs trusts, so you should work with an experienced estate planning attorney or elder law attorney.

To learn more about special needs planning, please visit our previous posts.

Reference: Forbes (Sep. 10, 2020) “Making Trusts for Special Needs Children”

Special needs plans need require regular reviews

Special Needs Plans Need Regular Reviews

November 16, 2020

Special needs plans need regular reviews and updates to be effective. For creating a wholly new plan or reviewing an older plan, one way to start is by writing a biography of a loved one with special needs, recommends the article “Special needs plan should be carefully considered” from The News-Enterprise.

Write down the person’s name, birth date and their age at the time of writing. Include information about favorite activities, closest friends and favorite places. Consider all of the things they like and dislike. Make detailed notes about relationships with family members, including any household pets. Think of it as creating a guide to your loved one for someone who has never met them. This guide will be useful in mapping out a plan that will best suit their needs.

Follow this by writing down what you envision for their future, in three distinct scenarios. A good future, where you are able to care for them, a not-so-great future where they are alive and well, but you are not present in their life and a bad future. You should be as specific as possible. This exercise will provide you with a clear sense of what pitfalls may occur, so you and your estate planning attorney can plan better.

Your plan needs to consider who will become the person’s guardian. You’ll need to list more than one person and put their names in order of preference. Consider the possibility that the first person may not wish to or be able to serve as a guardian and have second and third guardians. Talk to each person to be sure they are willing and able to take on this responsibility.

Next, consider living arrangements. Will your loved one be able to live independently, with regular check ins? Could they live in an accessory apartment with a guardian close at hand? Or would they need to live in a group care facility with an on-site social worker?

Special needs plans usually include a Special Needs Trust (SNT), with comprehensive details for the trustee. Just as you need multiple guardians, you should also name several trustees. The guardian is responsible for a person and the trustee is responsible for the property.

The question is raised whether a family member or a professional should be the trustee. Having a family member manage the finances is not always the best idea. A professional fiduciary will be able to manage the funds without the emotional ties that could cloud their ability to make good decisions. This is especially important, if the beneficiary has a drug dependency problem, does not have a strong family network or if the estate is large.

Consideration should also be given to having the trustee check in on the beneficiary on a regular basis to ensure that the beneficiary’s needs are being met. The trustee should have permission to make decisions about the use of the trust funds in special circumstances. The trustee will need to be someone who is skilled with managing money and is well-organized and responsible.

Special needs plans need regular reviews, but careful planning will give you the peace of mind of knowing that your loved one will be cared for by people you choose and trust.

If you would like to read more about special needs planning, please visit our previous posts.

Reference: The News Enterprise (Oct. 13, 2020) “Special needs plan should be carefully considered”

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How Does Planning for a Special Needs Child Work?

May 29, 2020

Funding a Special Needs Trust is just the start of the planning process for families with a family member who has special needs. Strategically planning how to fund the trust, so the parents and child’s needs are met, is as important as the creation of the SNT, says the article “Funding Strategies for Special Needs Trusts” from Advisor Perspectives. Parents need to be mindful of the stability and security of their own financial planning, which is usually challenging.

Parents should keep careful records of their expenses for their child now and project those expenses into the future. Consider what expenses may not be covered by government programs. You should also evaluate the child’s overall health, medical conditions that may require special treatment and the possibility that government resources may not be available. This will provide a clear picture of the child’s needs and how much money will be needed for the SNT.

Ultimately, how much money can be put into the SNT, depends upon the parent’s ability to fund it.

In some cases, it may not be realistic to count on a remaining portion of the parent’s estate to fund the SNT. The parents may need the funds for their own retirement or long-term care. It is possible to fund the trust during the parent’s lifetime, but many SNTs are funded after the parents pass away. Most families care for their child with special needs while they are living. The trust is for when they are gone.

The asset mix to fund the SNT for most families is a combination of retirement assets, non-retirement assets and the family home. The parents need to understand the tax implications of the assets at the time of distribution. An estate planning attorney with experience in SNTs can help with this. The SECURE Act tax law changes no longer allow inherited IRAs to be stretched based on the child’s life expectancy, but a person with a disability may be able to stretch an inherited retirement asset.

Whole or permanent life insurance that insures the parents, allows the creation of an asset on a leveraged basis that provides tax-free death proceeds.

Since the person with a disability will typically have their assets in an SNT, a trust with the correct language—“see-through”—will be able to stretch the assets, which may be more tax efficient, depending on the individual’s income needs.

Revocable SNTs become irrevocable upon the death of both parents. Irrevocable trusts are tax-paying entities and are taxed at a higher rate. Investing assets must be managed very carefully in an irrevocable trust to achieve the maximum tax efficiency.

It takes a village to plan for the secure future of a person with a disability. An experienced elder law attorney will work closely with the parents, their financial advisor and their accountant.

Reference: Advisor Perspectives (April 29, 2020) “Funding Strategies for Special Needs Trusts”

How Do ABLE Accounts Work?

March 18, 2020

It took nearly a decade of lobbying, but in 2014, Congress passed the Achieving a Better Life Experience Act. The law, referred to as ABLE, lets people with disabilities open a tax-advantaged account, similar in many ways to 529 accounts used to help with college funding. ABLE accounts are explained in the article “Everything You Need to Know About ABLE Accounts” from U.S. News & World Report.

The accounts allow eligible individuals to save money without putting their eligibility for government benefits at risk. The income from the account is not used for means testing for Social Security Income or Medicaid.

However, despite these benefits, ABLE accounts are still not widely used. Less than 57,000 accounts have been opened nationwide. Here’s more information on how they work.

Why would a disabled person want an ABLE account? Living with any type of disability is costly. There are out-of-pocket expenses for transportation, housing, and education that may not be covered by government programs. Those programs limit a person’s assets to $2,000. Prior to the ABLE Act becoming law, that meant that a disabled person could not save money for their own use. While there are limits to the size of ABLE accounts, they provide an opportunity for a financial cushion.

Who is eligible for an ABLE account? A person who became blind or disabled before age 26 may be the beneficiary of an ABLE account. Someone who is receiving SSI or Social Security Disability benefits is automatically eligible to open an account. Others will need to meet Social Security’s definition of being disabled and have a doctor’s letter stating that they are disabled to qualify.

Do all states offer ABLE accounts? There are 42 states, plus the District of Columbia, that offer ABLE Accounts. But a disabled resident of a state that does not offer ABLE accounts can open one with another state’s program. Right now there are 26 states that let anyone open an account, and the rest limit their programs to state residents. An estate planning attorney will know what your state’s rules are.

Are there tax incentives for using an ABLE account? This varies by state. Michigan and Arkansas let single filers deduct $5,000 in contributions to an ABLE account on their state tax forms. For joint filers in these two states, the maximum deduction is $10,000. In Illinois, there is a state income tax deduction of $10,000 for a single filer and $20,000 for joint filers. For Kansas, deductions are smaller; $3,000 for individuals and $6,000 for couples. New York State and California do not allow any deductions.

How much can be contributed to an ABLE account? $15,000 a year is the limit for annual contributions. Be aware that the first $100,000 of an account’s balance is shielded from asset means testing for government programs. Once the account reaches $100,001, it could impact SSI benefits.

What expenses can the ABLE account be used for? The account is designed to be used by people with disabilities, so things like medical treatment, transportation, education, and assistive technology are permitted uses. The expense must be related to a person’s disability.

Does it cost anything to open an ABLE account? This varies by state. In Ohio, you’ll pay $30 to open an account if you are a resident; out of state fees are $42 annually. In New York, only residents can open accounts, and the fee is $45 to open an account online and $55 if it is done on paper by mail.

Should a Special Needs Trust be used instead of an ABLE account? Many families chose a Special Needs Trust instead of an ABLE account. These trusts cost more to setup, but also offer more flexibility. They once were the only option. An estate planning elder law attorney will be able to guide the family as to which is the best solution for their disabled family member.

Reference: U.S. News & World Report (February 18, 2020) “Everything You Need to Know About ABLE Accounts”

Suggested Key Terms: ABLE Account, Achieving a Better Life Experience Act, Social Security, Means Tested, Special Needs Trust, Disability

Category: ABLE accounts

Special Needs Plans Need Regular Reviews

How Does Planning for a Special Needs Child Work?

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