Planning for Special Needs and Circumstances

Estate planning for beneficiaries with disabilities requires a fundamentally different approach than traditional planning. The primary goal is to supplement--not replace--government benefits while enhancing the beneficiary's quality of life. A misstep can disqualify a beneficiary from essential programs like Medicaid (which may cover $50,000+ annually in medical and long-term care costs) or Supplemental Security Income (SSI). For CFP professionals, understanding special needs planning is essential when advising families with disabled dependents.

Government Benefits at Risk

Means-Tested Benefits

These benefits have income and asset limits--receiving an inheritance or large gift can cause immediate disqualification:

Critical Point: If a beneficiary receives $10,000 directly as an inheritance, they could immediately lose SSI eligibility (exceeding the $2,000 asset limit), which may also terminate their Medicaid coverage.

Entitlement Benefits

These programs are NOT affected by assets or income:

• Social Security Disability Insurance (SSDI): Based on work history, no asset test
• Medicare: Based on age (65+) or SSDI eligibility after 24 months

Planning Implication: A beneficiary receiving only SSDI/Medicare without SSI/Medicaid has more flexibility in receiving assets directly. However, if they ever need Medicaid for long-term care in the future, direct asset ownership could become problematic.

The Goal: Supplement Without Replacing

The fundamental principle of special needs planning is that trust funds should pay for items and services that enhance quality of life without duplicating what government benefits already provide. This approach:

• Preserves eligibility for SSI, Medicaid, and other means-tested programs
• Allows family resources to provide extras: vacations, electronics, therapy, education
• Ensures long-term financial security beyond what public benefits offer
• Maintains the beneficiary's dignity and quality of life

Overview of Special Needs Planning Tools

Special Needs Trusts (SNTs)

Special needs trusts are the primary vehicle for holding assets intended for a beneficiary with disabilities. There are two main types:

1. First-Party (Self-Settled) SNT: Funded with the beneficiary's own assets (lawsuit settlement, inheritance received directly, work earnings). Requires Medicaid payback at death.

2. Third-Party SNT: Funded by someone other than the beneficiary (parents, grandparents, other family). No payback requirement--remaining funds can pass to other family members.

ABLE Accounts

ABLE (Achieving a Better Life Experience) accounts are tax-advantaged savings accounts for individuals with disabilities. Key features:

• Up to $100,000 can be saved without affecting SSI eligibility
• Tax-free growth and tax-free withdrawals for qualified disability expenses
• Annual contribution limit of $19,000 (2025) / $20,000 (2026)
• Simpler administration than SNTs
• Medicaid payback provision applies at death

Letter of Intent

A letter of intent is a non-legal document that provides guidance to future caregivers about the beneficiary's:

• Daily routines and preferences
• Medical history and medications
• Behavioral triggers and coping strategies
• Favorite activities and social connections
• Religious or cultural practices
• Educational and vocational goals

While not legally binding, this document is invaluable for trustees, guardians, and caregivers who may not know the beneficiary intimately.

Coordination with Other Family Members' Plans

Special needs planning must be coordinated across the entire family:

Grandparents and Extended Family

• Inform all family members about the risks of direct gifts or bequests
• Provide language for including the beneficiary through an existing SNT
• Consider including a "special needs trust trigger" clause in wills

Siblings

• Address potential future role as trustee or guardian
• Discuss inheritance equity considerations
• Consider whether siblings' inheritances should be held in trust (to protect from creditors and ensure availability for family support)

Life Insurance Beneficiaries

• Never name the disabled individual as a direct beneficiary
• Name the SNT as beneficiary, or name a trustworthy individual who will contribute to the SNT

Common Mistake: A well-meaning grandparent leaves $50,000 directly to a disabled grandchild in their will. Without knowledge of the special needs plan, this gift causes immediate loss of SSI and Medicaid benefits. The inheritance is quickly spent on medical costs that Medicaid would have covered, leaving the beneficiary worse off.

Planning Considerations

Selecting the Right Tool

When to Use Each Tool

• First-Party SNT: Personal injury settlement, inheritance received directly before planning could occur, divorce settlement
• Third-Party SNT: Parents funding from their estate, life insurance proceeds, ongoing family contributions
• ABLE Account: Regular savings for disability expenses, employment income, smaller inheritances (up to annual limits)

Many families use multiple tools together: a third-party SNT funded by parents' estate for large assets, plus an ABLE account for day-to-day expenses that gives the beneficiary more independence and financial education.