Special needs trusts can help protect vulnerable beneficiaries after the death of a parent or loved one. Although planning for such an event can be emotional and overwhelming, it’s best to prepare as early as possible.

Learn why special needs trusts are so important and how you can create one as part of your estate plan in the Commonwealth of Virginia.

What is a special needs trust?

A special needs trust is a way for the parent or caretaker of an incapacitated individual to provide for that individual in the event of the parent’s or caretaker’s death. There are three different types of special needs trusts:

• First-party special needs trust, which is used for assets that belong to the incapacitated individual, (whom we refer to as the “first-party”), often as a result of a personal injury or medical malpractice settlement, where a court enters an Order directing that the settlement funds be managed by a trustee for the lifetime care and benefit of the individual until his or her death, at which point any remaining assets pass to Medicaid for use in supporting other individuals with special needs who also require lifelong medical care. This type of trust allows the individual to qualify for Medicaid and other federal or state benefits even though he or she has received a large settlement.
• Third-party special needs trust, is created by a parent or other loved one, (whom we refer to as “the third-party”), for the benefit of an incapacitated individual using assets that belong to the parent or loved one, never the individual himself or herself. Often, life insurance is used to fund this type of trust at the time the parent or loved one dies.  Because the incapacitated individual has no control over these assets and they are used solely to supplement their needs, in addition to Medicaid and other federal benefits, the assets held by this trust do not count against and cause the incapacitated individual to be disqualified from critical federal or state benefits during his or her lifetime.  If any assets remain in this type of trust at the death of the third-party parent or loved one who funded it, the Trust can provide for contingent beneficiaries (other family members) to receive whatever remains.  It does not pass to Medicaid to re-distribute to other individuals as is the case with a first-party special needs trust.
• Pooled special needs trust, is created using a formalized legal agreement with a state-approved, nonprofit organization where the incapacitated person’s inheritance is pooled with others and used first for his or her care until death and then the balance is kept in a pool by a corporate trustee (selected by the nonprofit organization) to use for other members participating in the pooled trust. The benefit of a pooled trust is that it allows individuals with very modest assets to have a corporate trustee involved when parents or loved ones have no one else they can appoint as trustee and because many millions of dollars are part of this pooled trust, the corporate trustee management fees are spread out across a large number of assets and more affordable for all participants in the pool.

Why create a special needs trust?

If an individual’s disability keeps them from being able to work and fully support themselves, their caretaker or parent may want to make arrangements to continue providing for them after they pass away without fear that doing so will prevent the individual from continuing to receive critical federal and state benefits such as Medicaid.  Since assets held in a special needs trust do not count against the individual when applying for or continuing to receive such benefits, these trusts offer a lifeline of supplemental assistance where programs like Medicaid fall short, and provide an opportunity for “qualify of life” not just bare subsistence.  Special needs trusts serve as a money management tool, allowing a person or banking institution to use diligence to budget and plan for important expenditures that will never be covered by any federal and state program, such as buying or modifying a home (or vehicle) for the incapacitated person.

How to create a special needs trust in Virginia

1. Consult an experienced attorney.

To preserve your disabled loved one’s ability to continue receiving any government benefits, it is crucial to produce a special needs trust that is well. Work with a lawyer who is already an expert in special needs trusts and can guide you on which provisions need are required in your specific situation. As experts, they can also make recommendations based on your loved one’s age, needs, benefits, and living situation.

2. Establish the goal of the trust.

When preparing your special needs trust, decide what goals you have for the trust. What is important to you for the trust to be able to do? Do you want to avoid probate and have the trust be straightforward? Are you looking to protect the assets from third parties? Do you want to control or regulate the distribution of money? Your lawyer can guide you through those possibilities and make sure your special needs trust is doing everything you need it to.

3. Set parameters.

After figuring out the goals of the trust, work with your lawyer to carefully set all of the parameters. Identify an asset amount, decide when benefits are disbursed for your loved one, who can access those benefits, and, ultimately, what they can actually be used for. This is also a good time to consider a trustee; your trustee needs to be someone who can fulfill the regular maintenance of a trust, like accounting and tax returns, as well as caring for the specific needs of your loved one.

Special needs trust vs. ABLE Act accounts

You might be considering an ABLE Act Account in place of a special needs trust. An ABLE account is a tax-exempt savings account that can be used to hold an incapacitated individual’s own income or assets as well as gifts from others, and the first $100,000 in such assets will not be counted against the individual for purposes of obtaining Supplemental Security Income (SSI) and Medicaid benefits. Under current 2022 Rules, in order to set up ABLE Act Account, an individual must have become disabled before turning 26 years of age, and the contributions to such an Account are tied to the annual gift tax exemption which is currently $16,000 per year.

Although the ABLE Act Accounts can be very useful to hold assets that cannot be part of (or should not be part of a Special Needs Trust), this type of Account works like a first-party special needs trust in that all funds not utilized by the individual from this Account will be captured by and pass to Medicaid for use in providing future services to other individuals.  The balance cannot be passed on to other family members or loved ones.  For this reason, if the funds one has to give to an incapacitated person do not belong to them already and are really being left to them (or gifted to them) by a parent or other family member, it is generally best to utilize a Third-Party Special Needs Trust either in addition to or in lieu of the ABLE Act Account. An experienced attorney can help you determine the best approach.

Want to create a special needs trust to protect your loved one? For over 20 years, the Law Office of Patricia E. Tichenor has helped Virginia families plan ahead and address their unique estate planning needs. Schedule your free consultation today.