Trust Planning & Special Needs Financial Planning Tools

By: Michelle A. Ross, Esq.

There are various financial planning tools designed to support individuals with disabilities, ensuring they remain eligible for government benefits while managing their own inherited assets effectively. Some of these mechanisms are crucial for providing financial security and improving the quality of life for people with disabilities. Tools like Third-Party Supplemental Needs Trusts, First-Party Special Needs Trusts, Pooled Special Needs Trusts, and ABLE Accounts play a vital role in ensuring that individuals with disabilities can maintain their financial independence and support without compromising their access to essential government programs. The following is a list of the most important aspects and elements of each.

Third-Party Supplemental Needs Trust

  • Established with funds owned by a third-party grantor (parent, sibling, friend, etc.) for the benefit of a disabled beneficiary.
  • Can be established at death through a will or revocable living trust.
  • Can be established during life as an inter-vivos trust with contributions made from third parties.
  • The trust must be reported to the County Assistance Office (CAO) in Pennsylvania if the beneficiary ever applies for the receipt of Medical Assistance (MA) benefits – there are likely similar reporting requirements in other states.
  • No limit to the size of the trust.
  • Funds can be used for almost anything a beneficiary needs to supplement their government benefits.
  • Funds in the trust will generate income tax for the donor, not the beneficiary.
  • Upon the beneficiary’s death, the assets can pass to the grantor’s named beneficiaries of the grantor’s choice.
  • Upon the beneficiary’s death, the government is not entitled to be paid back from the trust for governmental benefits expended to the disabled beneficiary since the trust assets never belonged to the beneficiary.

First-Party Special Needs Trust

  • Also known as “special needs,” “self-settled,” or “Medicaid payback” trusts.
  • Established with the assets of a disabled individual for the purpose of remaining eligible for receipt of MA, Social Security Income (SSI), and other asset-based government benefits.
  • Used when a person with a disability owns assets, inherits property outside of the Third-Party Supplemental Needs Trust, or, most often, receives a court settlement (personal injury, wrongful death).
  • Also used when a person owns assets and later becomes disabled.
  • Can only be established if the beneficiary meets the definition of disabled as determined by the government and is under 65 years of age.
  • Must first be approved by the Department of Human Services (DHS), the Social Security Administration (SA), and the relevant county court.
  • Funds can only be used for the sole benefit of the beneficiary during the beneficiary’s lifetime.
  • Trust is irrevocable and cannot be changed without court/government entity approval.
  • The trust assets are protected from the beneficiary’s creditors.
  • Trust is meant to supplement, not supplant, government benefits, and can be used towards payments for caregiver costs, education costs, furniture and closing, home modifications, and pre-paid funeral expenses.
  • The trustee can be a family member, a corporate fiduciary, an attorney, etc., but NOT the beneficiary.
  • Any trust assets remaining at the death of the beneficiary must first be paid back to DHS for any MA benefits expended during the beneficiary’s lifetime.
  • Any remaining trust assets after payback to the government can be distributed to contingent beneficiaries named in the trust.

Pooled Special Needs Trust

  • This is a type of First Party Special Needs Trust, so the same elements above apply, in addition to the below items.
  • Often established if a court settlement is too small to justify the fees and costs associated with a typical First Party Special Needs Trust, or if it is too difficult to find a trustee willing to serve.
  • Can only be established and administered by a non-profit association for the benefit of multiple beneficiaries and is overseen by the Office of Attorney General (OAG).
  • A separate account is maintained for each beneficiary, but the assets of all beneficiaries are pooled together for purposes of investment and management.
  • Controlled with a Master Trust Agreement pursuant to a Joinder Agreement.
  • At the death of the beneficiary, the funds can remain in the pool for other individuals with disabilities.
  • Alternatively, the funds can be distributed to the contingent beneficiaries named in the Joinder Agreement, if any remain after first being used to pay back DHS for MA benefits expended.

ABLE Account

  • An Achieving a Better Life Experience (ABLE) account is a tax-advantage savings account for disability-related expenses.
  • To qualify for an ABLE account, you must have a qualifying disability that started before age 26 and be eligible for SSI or Social Security Disability Insurance (SSDI) benefits.
  • Tax-free way to save for disability-related expenses while maintaining qualification and receipt of government benefits.
  • Annual account contribution maximum for the year 2024 is $18,000.00.
  • Savings do not count against eligibility and receipt of any federal needs-based benefits including Supplemental Nutrition Assistance Program (SNAP) benefits (formerly known as food stamps), Temporary Assistance for Needy Families (TANF) benefits (for pregnant women and dependent children), certain MA benefits, housing assistance programs, student financial aid, etc., so long as the amount in the account does not exceed $100,000.00.
  • Can roll over a 529 plan account (tax-advantage savings plan for future education/college costs) into an ABLE account, up to the annual contribution limit.
  • Anyone can make gifts into the ABLE account.
  • Any ABLE account earnings will grow income tax-deferred and withdrawals for qualified disability expenses are income tax-free.
  • Contributions to an ABLE account are state tax-deductible.
  • Assets are excluded from PA inheritance tax and are creditor protected.
  • A Trustee is not required.
  • The ABLE account can be transferred, without tax consequence, if the new beneficiary is a sibling of the old beneficiary and has a qualifying disability.
  • At the account owner’s death, for accounts with a successor account owner listed, that person will become the new owner of the account.
  • For accounts without a successor account owner listed, the money in the account can be used to pay for any of the deceased owner’s qualified disability expenses, including funeral and burial expenses, and any remainder will become part of the decedent’s estate.
  • Assets are not subject to DHS repayment/payback at the death of the owner (unless/until transferred to the decedent’s estate).

If you have any questions on the financial planning tools designed to support individuals with disabilities, or would like more information, please contact Michelle A. Ross.

Michelle is Counsel with Leech Tishman and member of the Trusts & Estates and Litigation Practice Groups. Michelle focuses her practice on trusts and estates planning and administration, elder law and guardianships, and various other Orphans’ Court fiduciary litigation. Michelle is based in the Pittsburgh office and can be reached at 412.261.1600 or mross@leechtishman.com