Updated: Apr 12, 2020
Parents in Georgia want their children to be taken care of after they die. Children with disabilities typically have increased financial and care needs, which means that ensuring their long-term welfare can be tricky. Proper planning is necessary to benefit the child with a disability, including an adult child, as well as assist any siblings who may be left with the caretaking responsibility.
Special Needs Trusts
The best and most comprehensive option to protect a loved one is to set up a special needs trust (also called a supplemental needs trust). These trusts allow beneficiaries to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). The trusts are drafted so that the funds will not be considered to belong to the beneficiaries in determining their eligibility for public benefits.
There are three main types of special needs trusts:
A first-party trust is designed to hold a beneficiary’s own assets. The person with the disability is the one setting up the trust. While the beneficiary is living, the funds in the trust are used for the beneficiary’s benefit, and when the beneficiary dies, any assets remaining in the trust are used to reimburse the government for the cost of medical care. These trusts are especially useful for beneficiaries who are receiving Medicaid, SSI or other needs-based benefits and come into large amounts of money, because the trust allows the beneficiaries to retain their benefits while still being able to use their own funds when necessary.
Third-party special needs trust
A third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect a beneficiary’s access to benefits and the funds can be used to pay for the beneficiary’s needs beyond those covered by government benefits. Upon the beneficiary’s death, the third-party trust is not required to use the remaining assets to reimburse Medicaid benefits received by the beneficiary during his or her lifetime.
A pooled trust is an alternative to the first-party special needs trust. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources with those of other trust beneficiaries for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in the account reimburse the government for care, but a portion also goes towards the non-profit organization responsible for managing the trust.
Life insurance can be an essential tool to fund special needs trusts. Once you establish the trust, a life insurance policy can pay directly into it. One of the key benefits of using a trust is that the beneficiary avoids probate. You can also plan so that the money used to fund the trust will not be subject to estate taxes (based on current federal estate tax exemption amounts at the time the policy is taken out). The beneficiary designation for the policy must name the trust, not the child. You should make sure you have enough insurance to pay for your child’s care long after you are gone. Without proper funding, the burden of care may fall on siblings or other family members. Using a life insurance policy will also guarantee future funding for the trust while keeping the parents’ estate available for other purposes -- whether that’s for other family members, charitable giving, or whatever else aligns with the parents’ goals or values. When looking for life insurance, consider a second-to-die policy. This type of policy only pays out after the second parent dies, and it has the benefit of lower premiums than regular life insurance policies.
An Achieving a Better Life Experience (ABLE) account allows people with disabilities who became disabled before they turn 26 years old to set aside up to $15,000 a year in tax-free savings accounts. An ABLE account will not affect eligibility for government benefits. This money can come from the individual with the disability or anyone else who may wish to give him money.
Created by Congress in 2014 and modeled on 529 savings plans for higher education, these accounts can be used to pay for qualifying expenses of the account beneficiary, such as the costs of treating the disability or for education, housing and health care, among other things. You can learn more about the ABLE plan available in Georgia here: https://www.georgiastable.com/
Although ABLE accounts are easy to set up, there are hidden pitfalls associated with spending the funds in the accounts -- both for the beneficiary and for family members. In addition, ABLE accounts cannot hold more than $100,000 without jeopardizing government benefits like Medicaid and SSI. If funds remain in an ABLE account upon the death of the account beneficiary, they must be first used to reimburse the government for Medicaid benefits received by the beneficiary, and then the remaining funds will have to pass through probate in order to be transferred to the beneficiaries and heirs.
However you decide to provide for a child with special needs, proper planning is essential. Give The Sullivan Law Firm in Savannah, Georgia a call today so that we can get started with helping you provide for someone with special needs. Protect Loved ones and Assets Now -- Have a P.L.A.N.(tm)