Estate Planning for Children with Special Needs: “Special Needs Trusts” and the “ABLE” Act

When seeking benefits for a disabled relative, it is important to know what all of your options are. The government offers different opportunities to receive benefits for your loved ones and an estate attorney, with expertise in Special Needs Planning, can help you navigate those government programs with ease.

Government Benefits for the Disabled and Who Qualifies:

Medicare is a federal assistance program administered by the Health Care Financing Administration of the U.S. Department of Health and Human Services unrelated to need available to:

• People age 65 and older
• People at any age with permanent kidney failure
• Certain disabled people under age 65

Medicaid is a federal and state financed assistance program administered by the Centers for Medicare and Medicaid Services of the Department of Health and Human Services for:

• Needy and low income persons who are aged, blind, or disabled.

Medicaid offers coverage for most of the costs of long-term nursing home care after financial resources have been exhausted. Louisiana’s Governor John Bel Edwards’ first act upon assuming office was to elect Medicaid Expansion.

Supplemental Security Income Program is a federally sponsored program administered by the Social Security Administration for:

• The elderly, blind, or disabled who are financially needy.
• In Louisiana, Supplemental Security Income Program eligibility automatically confers Medicaid eligibility. Louisiana’s administration of Medicaid and Supplemental Security Income is by the Louisiana Department of Health and Hospitals.

Social Security Disability Benefits is a disability insurance program administered by the Social Security Administration available to:

• Individuals who have been unable to engage in any substantial gainful employment due to a medically established mental or physical impairment which is expected to result in death or has existed or can be expected to last continuously for no less than 12 months.

An individual will make payments into the system throughout their working career and if that individual were to become disabled, the amount of monthly disability payments that individual is entitled to will be dependent on the amount that individual paid into the system.

Qualifying and Retaining Supplemental Security Income (SSI) and Medicaid:

In order to qualify and retain government benefits an applicant cannot exceed the “Countable Resource” Cap or the Income Cap. The “Countable Resources” Cap is set at $2000 for a single individual and $3000 for a married couple. The Income Cap is adjusted annually and is currently set at $2199 per month; no change was made from 2015 to 2016. Certain resources are non-countable towards “Countable Resources”: a home; personal effects including clothing, wedding and engagement rings, photographs, musical instruments; personal care items and educational or recreational items; household furnishings, furniture, televisions, paintings, electronics; life insurance without cash surrender value or life insurance with cash value of no more than $1500; burial spaces for the applicant, spouse and immediate family, prepaid funeral costs and burial funds up to $1500; one vehicle used for employment and/or medical treatment.

Special Needs Trusts and The “ABLE” Act

Special Needs Trusts provide for a disabled person’s special needs without jeopardizing the person’s benefits. President Obama signed the “ABLE” Act on February 19, 2014 to help disability advocates looking for a less complicated planning tool than Special Needs Trusts.

Two Main Types of Special Needs Trusts:

Third-Party Trusts are Special Needs Trusts established by a third-party with his assets for the benefit of a disabled person. The goals of these trusts are to enrich the beneficiary’s life while preserving available public benefits, manage assets, control distributions, and to provide for the beneficiary if public benefits are eliminated later. These types of trusts are typically established by a parent for a disabled child, by grandparents, siblings, or by a child for a disabled parent. These trusts have no requirement that the state Medicaid agency be paid back on the death of the beneficiary. There is no federal statutory authority for these kinds of trusts. The limitations to these types of trusts are that the trust’s income and assets are not to be considered “available” to the beneficiary, no distributions of principal and/or income may be made that would reduce the amount of public benefits and the beneficiary cannot compel distributions.

Third-Party Trusts can be inter vivos, created during lifetime, or testamentary, created in a will. An inter vivos trust can be more desirable since others may contribute to it and can be an unfunded standby trust that is funded upon the settlor’s death. Third-party trusts have income tax considerations: the trust should use a separate tax ID number, trust income distributed to or for the benefit of the beneficiary is reported on a Schedule K-1 provided to the beneficiary. The trustee must be able to show that distributions were made for extra and supplemental purposes.

If a parent dies without a will or includes a trust for a disabled child that is not a Special Needs Trust, an attempt can be made to petition the court to establish a Special Needs Trust or reform a non- Special Needs Trust into a Special Needs Trust.

Some suggested provisions in Special Needs Trusts include that the trustee has the authority to amend the trust to conform to changes in federal or state law or regulations. Another suggested provision is that a third-party is given the power to amend, such as a “trust protector” or a “special trustee.” Some provisions that are not included in the Special Needs Trusts are provisions that would cause the trust assets to be considered “countable resources” of the beneficiary: that the trustee may distribute income or principal for the beneficiary’s “health, education, and welfare” or for the beneficiary’s “health, support and maintenance”, that the trustee has complete discretion to make any and all distributions the trustee deems appropriate or that the beneficiary has the right to compel payments from the trust for support and/or maintenance.

Self-Settled Special Needs Trusts are trusts established with the assets of the disabled person. These types of trusts must be established by the “tutor” of the disabled person or by the court. Only the disabled person can be a beneficiary of these trusts. These types of trusts are often used when an injured person receives money as a result of a tort action. These trusts can also be used if the beneficiary receives a distribution in the settlement of a community property regime or if a disabled person receives an inheritance. These trust must be inter vivos and irrevocable. Medicare claims and Medicaid liens may apply to the funds and cannot be used if the beneficiary is over age 65.

A critical piece of Self-Settled Special Needs Trusts is the “Payback Provision.” The “Payback Provision” was established in 1993 and states that the trust must provide that, at the death of the disabled beneficiary the state Medicaid agency the Department of Health and Hospitals in the state of Louisiana must be repaid for all funds expended on behalf of the beneficiary. In the case where more than one state has made payments, repayment is made between the states. The “Payback Provision” allows for certain deductions prior to the payback. Taxes due from the trust to the state or federal government because of the death of the beneficiary and reasonable fees to administer the trust estate, including accountings to the court, completion and filing of documents, and other actions required for the termination of the trust, are all deductions. Debts to third parties and payments to residual beneficiaries are not allowed as deductions. Funeral expenses are also not allowed as deductions but the trustee should purchase a prepaid funeral for the beneficiary during the trust’s administration.

Proper Distributions from a Special Needs Trust

• Payments to third-party vendors and not to the beneficiary, provided the payments are not for the beneficiary ‘s food or shelter.
• Medical care and procedures.
• Dental care.
• Ophthalmic care.
• Auditory care.
• Psychological support services.
• Supplemental nursing or physical therapy care.
• Rehabilitation.
• Differentials in cost between housing and shelter for a shared or private room in an institutional setting.
• Expenditures for transportation and travel.
• Companionship.
• Entertainment, recreation, leisure and cultural expenses.
• Education, vocation, and training expenses.
• Bringing family members and friends for visitation with beneficiary?
• Care that assistance programs do not provide.
• Costs for care manager.
• Lawn care at beneficiary’s home.
• Improvements and repairs to the beneficiary’s home and tools purchased for the repairs.
• Purchases and maintenance of a car, including gas expenses.
• Cleaning costs, including home care.

The “ABLE” Act – “Achieving a Better Life Experience Act”

The “ABLE” Act was put in place because disability advocates desired lower costs, a reduction in the need of extended attorney involvement, a less complicated tool than Special Needs Trusts, and one where the intended beneficiary can open an account for him or herself. Even though the “ABLE” Act was signed in 2014, the “ABLE” Accounts are not quite ready yet. Things preventing the “ABLE” Act from being up and running is state legislative laws, state administrative set-ups, and final IRC and SSA Regulations. In the state of Louisiana, Act No. 411 was enacted in 2015 which authorized ABLE Accounts under La. R.S. 46:1721, et seq. but the Accounts are not yet available. Ohio may be the first state that will have ABLE Accounts available.

How the Act was Designed:

• Adds §529A to the Internal Revenue Code
• Modeled after IRC §529 education plans
• Account balance excludable for purposes of Supplemental Security
• Income/Medicaid eligibility

Eligible Beneficiaries Under the “ABLE” Act are those individuals who are “entitled to benefits based on blindness or disability under Title II or XVI of the Social Security Act…” and whose disability occurred “before the date on which the individual attained the age of 26 [IRC§529A(e)(1)(A)].”

ABLE Accounts are set up so that an investment account balance is a non-countable resource as with Special Needs Trusts. Individuals are limited to one ABLE account, and total annual contributions by all individuals to any one account for each year cannot exceed the gift tax annual exclusion, which is $14,000 in 2016. [IRC§529A(b)(2)(B)]. Withdrawals are allowed for “qualified disability expenses.”

Qualified Disability Expenses are any expenses relating to the disability, including:

• Education
• Housing
• Transportation
• Employment training and support
• Assistive technology and personal support services
• Health, prevention and wellness
• Financial management and administrative services
• Legal fees
• Expenses for oversight and monitoring
• Funeral and burial expenses

Contributions and Distributions

• Contributions must be “cash.”
• Rollovers are permitted to a family member who is also disabled.
• Exception: “Qualified disability expenses”(QDE) may be reimbursed, including to the beneficiary.
• A 10 % surtax is placed on distributions other than for QDE and included in the beneficiary’s taxable income.

Suspension of Supplemental Security Income (SSI) Benefits

• $100,000 account balance limit for SSI recipient’s benefits.
• If the account balance exceeds $100,000, monthly income will be discontinued until the balance is less than $100,000.
• Does not impact eligibility for Medicaid supports and services.

Medicaid – Payback

Upon the death of the designated beneficiary, the state Medicaid plan may file a claim against the account. The state is a creditor, not a beneficiary, and is “subject to any outstanding payments due for qualifies disability expenses.” Payback may be state-optional, since states may not be required to file claims. The payback includes 3^rd party contributions.

Other Things to Know

• Limited ability to direct investment decisions (2x/yr maximum)
• Gift tax effect to donor: completed gift of present interest
• Bankruptcy exclusion if contributions made a year in advance by parent, stepparent, grandparent, or step-grandparent

Administration of Qualified Able Programs (QAP)

• ABLE Accounts- established and maintained under QAP
• State sponsored investment accounts f/b/o any “Eligible Individual”

Where ABLE Might Fit

• Mix and Match – assume $ within range:
• Small amounts of 1^st party monies
• Control for competent beneficiaries
• Accumulation of wages over time
• Transfer balance of UTMA accounts at age of distribution
• Save for purchase of home, car, wedding or funeral
• Disability has potential to resolve
• No available or competent d4C (pooled trust) entity