An estate plan may require special needs planning for a variety of reasons. Parents or grandparents may wish to leave a gift to a child or grandchild who receives public benefits for a disability. A person with a disability may receive an inheritance or a personal injury settlement and need to figure out how to avoid becoming ineligible for their public benefits. Special needs planning can help ensure that public benefits are not disrupted for disabled individuals in these situations. Estate planning attorneys have several tools at their disposal to achieve this goal. It is critical that a person wishing to include a disabled individual as a beneficiary in their estate plan consult with an estate planning attorney with experience working with special needs trusts to optimize the disabled individual's inheritance. Read further below to learn more about these tools and strategies. 

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Most people have heard the term "special needs trust" but may not be sure exactly what it means. A special needs trust (SNT) is a trust created for the benefit of a person who meets the Social Security definition of "disabled" and receives public benefits based on their disability. If drafted correctly, the assets in a SNT are not counted when determining the individual's eligibility for public benefits. There are several types of SNTs, and each must meet different legal requirements to avoid disrupting the individual's public benefits. Funds in a SNT may be used to supplement but not replace the individual's public benefits. While they are subject to specific legal requirements, SNTs offer a great deal of flexibility to help the disabled individual improve their quality of life. For example, the beneficiary of a SNT could use some of the funds to pay for a vacation, as well as the cost of bringing a caregiver or other individuals necessary for his or her safety and care on the trip. The trust may also be used to cover expenses that are not approved or covered by Medicaid, such as a nicer wheelchair than what Medicaid will pay for. SNTs can be a great way for family members to help improve the quality of life of their loved ones with a disability. 

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SNTs are subject to several legal requirements, however. These legal requirements depend upon what type of SNT is created. There are three types of SNTs: third-party special needs trusts, sometimes referred to as supplemental needs trusts, first-party special needs trusts, and pooled trusts, which are a type of first party special needs trusts. A third-party special needs trust is a SNT that is funded with assets from a third party, such as a parent or grandparent. These trusts are governed by state law and are subject to fewer requirements than first-party SNTs. These are most commonly used in estate plans when someone wants to leave a gift to an individual with a disability. First-party SNTs are funded with assets that belong to the disabled individual. These are commonly used with a person receiving public benefits receives an inheritance or a personal injury settlement. First-party SNTs are subject to both federal and state law and must include a provision that requires Medicaid to be paid back for medical expenses paid during the beneficiary's lifetime upon termination of the trust. Pooled trusts are a type of first-party SNT. In other words, they are funded with the disabled individual's own assets. A pooled SNT is established and managed by a nonprofit organization. Each beneficiary has their own account, but all beneficiaries' assets are invested together. This arrangement allows for lower administration costs and potentially greater investment opportunities, especially for those who may have a more modest trust corpus. With a pooled SNT, the beneficiary must agree to the organization's master trust agreement. 

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ABLE Accounts are another, newer tool available to disabled individuals. ABLE stands for "achieving a better life experience." These accounts are similar to 529 plans. Contributions grow tax-free, and distributions are not taxed as long as they are used for qualified disability expenses, which are similar to expenses permitted under a SNT. ABLE accounts have their limitations, however. For example, if the total balance of an ABLE account exceeds $100,000, the amount in excess of $100,000 will be considered when determining the individual's Supplemental Security Income. There are also limitations on how much can be contributed to an ABLE account each year. In 2025, this limit is $19,000. Similar to 529 plans, states offer their own ABLE account plans, and each state may administer the accounts slightly differently. ABLE accounts are a great tool for disabled individuals who do not have sufficient funds to warrant a SNT. In many cases, it is most advantageous for a disabled individual to have both an ABLE account and SNT to optimize the benefits of both of these tools. 

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Given the complexity of SNTs and the importance of preserving benefit eligibility, it is critical to talk to an estate planning attorney before designating a person receiving disability benefits as a beneficiary in your estate plan. If you are considering a gift to someone receiving disability benefits, or if you are receiving disability benefits and are anticipating an inheritance or settlement, Ferrara Law is here to provide guidance. 

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Click HERE to check out my recent blog post on ABLE Accounts and Special Needs Trusts to learn more about your options.

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