Millions of disabled individuals rely on public benefits to provide for medical care, food, and shelter.  To be eligible for these benefits, the disabled individuals must have very limited means.  The problem is that the public benefits that are provided are often insufficient to provide necessary or desirable goods and services to enhance the lives of the disabled individuals.  Therefore, loved ones of disabled individuals must consider options for funding the extra costs associated with living with a disability without causing the disabled individual to become ineligible for public benefits.  These options are summarized below.

I.          Achieving Better Life Experience (“ABLE”) Accounts

What is the purpose of an ABLE Account?

ABLE accounts are tax-free savings accounts that will be available for the benefit of individuals with disabilities to cover expenses related to the beneficiary’s disability without disqualifying the account beneficiary from government benefits such as Medical Assistance (“Medicaid”) and Supplemental Security Income (“SSI”).  These accounts will only available for beneficiaries with significant disabilities who became disabled before their twenty-sixth birthdays.  ABLE accounts are similar to 529 college savings accounts in that account contributions are not deductible for federal income tax purposes, but the account income is not taxed so long as distributions are made for qualified disability expenses.  In Maryland, residents who contribute to the Maryland-administered ABLE account will be eligible for a tax deduction of up to $2,500.00.

What are qualified disability expenses?

Qualified disability expenses are defined by the federal statute to include “expenses related to the blindness or disability of a beneficiary, including expenses for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, and expenses for oversight and monitoring, funeral and burial expenses.”  However, disbursements for housing expenses may be considered income for SSI eligibility purposes.

What are the restrictions associated with an ABLE account?

First, only one ABLE account is permitted per eligible beneficiary.  Second, the total annual contribution limit to an ABLE account from all sources is $15,000.00.  Third, if an ABLE account’s value exceeds $100,000.00, the beneficiary will be suspended from eligibility from SSI.  Fourth, the account limit for an ABLE account in Maryland is $350,000.00.  Fifth, ABLE accounts are subject to government recovery for Medicaid expenses at the beneficiary’s death regardless of the source of account funding. Sixth, the designated beneficiary must be the account holder and only the designated beneficiary or his legal guardian or attorney-in-fact may exercise signature authority over the account.

When will ABLE accounts become available?

The Maryland ABLE Program is currently operational and is managed by Sumday, a BNY Mellon Company.  Marylanders may open their accounts in another state instead of Maryland.

II.        Special Needs Trusts (“SNTs”)

What are SNTs?

SNTs are trusts that hold funds for the benefit of a disabled individual without disqualifying that individual from receiving government benefits.  SNTs can be used to enrich a disabled person’s life by paying for supplemental needs and luxury items that are not provided through public benefit programs.  The assets in a properly drafted SNT are not considered to be assets of the disabled individual because (1) the beneficiary has no right to distributions of income or principal of the trust, and (2) distributions from the trust made on behalf of the disabled individual are made directly to third-party providers.

Are there different types of SNTs?

SNTs are either first-party (self-settled) or third-party trusts, depending upon whether the disabled individual or another person provides the funds for the SNT.  Both types of SNTs are used to protect the assets of the trust and provide supplemental benefits to a disabled individual without rendering him ineligible for government assistance.  The primary difference between these two types of trusts is that if the SNT is funded with the disabled individual’s own assets, the government has a right to be repaid from the funds remaining in the trust when the disabled individual dies.  The government can seek reimbursement from the SNT up to the total amount of Medicaid paid on behalf of the disabled individual by the government during his lifetime.  If the SNT is funded exclusively with assets from a third party, the government has no such right to reimbursement, and the party who created the SNT may direct where the funds remaining in the SNT go when the disabled individual dies.

How should SNTs be funded?

There are many different ways to fund a SNT.  A trust may be set up for the benefit of a disabled individual with settlement proceeds following a personal injury or medical malpractice action that gave rise to the disability.  A person may choose to fund a SNT on behalf of a disabled individual during his lifetime as part of a strategy to protect assets from creditors and reduce total assets for tax or Medicaid planning purposes.  In addition, a SNT may be funded upon a person’s death by naming the SNT as beneficiary of retirement or pension plans or by directing in a will that some or all of such person’s assets go into the SNT.  If a person wants to provide for a disabled individual but does not have substantial assets to fund a SNT, he may purchase a life insurance policy and name the SNT as beneficiary.

III.       Pooled Asset Special Needs Trusts

Pooled Asset Special Needs Trusts are a type of SNT operated by a non-profit corporation whereby the assets of many individuals with disabilities are pooled together for investment and management purposes.  Each beneficiary has a separate account into which funds can be added or distributions can be made for the benefit of the beneficiary in the absolute discretion of the corporate trustee.  The assets in the beneficiary’s individual account are not counted when determining eligibility for government benefits such as Medicaid or SSI.  If the account is exclusively funded with the assets of third parties, the person establishing the account can decide who will receive any funds remaining in the account at the beneficiary’s death.  If the account contains the beneficiary’s funds, the beneficiary (or his representative) can select what happens to the funds remaining at his death from the following options: (1) account assets can remain in the pooled trust to help support the trust and other individuals with disabilities, (2) account assets can be used to reimburse the government for needs-based benefits paid on behalf of the beneficiary during his lifetime and then be distributed to individuals or organizations selected by the beneficiary (or his representative), or (3) account assets can be distributed utilizing a combination of options (1) and (2).

IV.       Other Alternatives

Should parents leave all of their assets directly to a special needs child?

Parents sometimes leave their assets directly to a special needs child and assume that their non-disabled children will be able to care for themselves. This is unwise from both an emotional and financial standpoint.  Emotionally, this could breed family resentment and deprive the disabled child of much needed support from surviving family members.  Financially, a disabled individual will be rendered ineligible for government assistance any time he owns assets exceeding $2,000.  This means that if a disabled individual receives an inheritance that raises his assets over the $2,000 threshold, he will lose his government benefits and will be forced to spend this inheritance for his care until his assets are once again depleted to $2,000.

Should parents exclude their special needs child from inheriting anything?

Parents sometimes leave their assets to their non-disabled children with the understanding that the non-disabled children will care for the disabled child.  This is also undesirable because this method creates a moral rather than legal obligation, and does not ensure that any money will actually be used for the benefit of the disabled child.  Even children with the best intentions will not be able to use inherited money for the benefit of their disabled sibling if this money becomes subject to the claims of their creditors or ex-spouses or if the non-disabled child dies.

For assistance with special needs planning, please contact
the Law Office of Jill A. Snyder at 410-864-8788.