Simona Ondrejkova, CFP

Oct 09, 2023

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A Guide to Estate Planning for Individuals with Special Needs

Estate planning for clients who have adults or children with special needs in their lives can be complex. Unlike traditional estate planning, special needs estate planning requires paying careful attention to the individual with special needs’ eligibility for government benefits. This is in addition to skillfully leveraging assets to most effectively attend to their unique health and wellness needs.

Imagine that one of your clients is a family with three adult children, all living in different states. The two younger brothers have established their own families and are financially comfortable. But their oldest sister is living with muscular dystrophy and needs assistance with essential activities like eating and bathing. In terms of estate planning, how can the parents of these three adult kids best plan to meet the needs of their disabled daughter…all while making sure that all three children receive an equitable inheritance?

In this guide, we’ll take a look at why estate planning for beneficiaries with special needs must be approached differently, how special needs trusts can help, and other factors that allow beneficiaries with special needs get access to the help they need to maximize their quality of life.

How do government benefits affect special needs estate planning?

Doing estate planning for disabled adults or those who have a loved one with special needs requires at least some understanding of the government benefits that these individuals receive. Without proper planning, your clients’ efforts to support an individual with special needs through their estate plan could potentially interfere with that individual’s ability to receive Supplemental Security Income (SSI) or Medicaid (also called Title XIX) assistance.

Supplemental Security Income (SSI) is a needs-based program for those with a disability that’s expected to last for at least one year or result in death. In determining whether an individual qualifies to receive SSI disability benefits, the Social Security Administration (SSA) looks at the individual’s income and resources including cash, bank accounts, real estate (other than a primary residence), and personal property that could be converted into cash. 

In 2024, the limit to qualify for SSI benefits is $2,000 or less in countable resources for an individual or $3,000 for a couple.

Medicaid is also a needs-based program. In most states, SSI recipients are automatically eligible to receive Medicaid, and it is often access to Medicaid that motivates an individual to apply for SSI. Similar to SSI, its asset limit is restrictive but can vary slightly from state to state. 

When advising clients on estate planning for individuals with special needs, it’s important to understand how a transfer of assets to the beneficiary could increase that individual’s asset level beyond a point at which they no longer qualify for benefits. This is why one of the most effective common strategies for special needs estate planning involves the use of some type of special needs trust.

What is a special needs trust?

A special needs trust, also known as a supplemental needs trust, is a trust created with the goal of providing support to an individual with disabilities without jeopardizing their access to government benefits. The trust can be funded with cash, investments, retirement assets, life insurance, lawsuit settlements, business interests, and personal and real property.

A special needs trust is managed by a trustee who can use the funds in the trust to cover various expenses that improve the beneficiary’s quality of life, such as medical and dental care, therapy, education, transportation, recreation, and personal items. For this reason, it’s important to choose a trustee who is trustworthy and genuinely understands the needs of the beneficiary.

It’s important to keep in mind that trust funds inside the special needs trust cannot be used for basic needs that government benefits are already meant to provide, such as food and shelter. 

Additionally, once created, it’s not always easy to dissolve a special needs trust without court approval or a legal process that considers changes in the beneficiary’s circumstances or trust assets. 

Who qualifies for a special needs trust? 

The individual whom a special needs trust is created for must have a qualifying disability as defined by the SSA or another government agency. Because these trusts are primarily used to protect eligibility for benefits such as SSI or Medicaid, the beneficiary must also either be receiving or eligible to receive these benefits.

A special needs trust can generally be created for individuals of any age, including minor children. There is one exception that we’ll touch on below as we discuss the different types of  special needs trusts used in estate planning for beneficiaries with special needs.

Third-party special needs trust (SNT)

The most common solution for clients who have loved ones with disabilities is to create a third-party special needs trust (SNT). Any person other than the beneficiary of the trust can establish a third-party SNT. This type of trust can be funded both during the settlor’s lifetime and upon their death.

A third-party SNT does not require using the remaining assets in the trust to reimburse government benefits after the beneficiary’s death. This means that the person funding the trust can direct what happens with the funds after the beneficiary’s death. 

As such, a third-party SNT presents a great tool for those who want to support the beneficiary with special needs and pass the remaining assets to other loved ones. For example, in the case of the family mentioned in the opening section of this article, the parents may structure the trust so that after their daughter passes, any remaining assets left in the SNT are distributed to their two sons.

First-party special needs trust (SNT)

A first-party special needs trust (SNT), also known as a self-settled SNT, payback trust, or a (d)(4)(A) trust, is a trust funded with assets owned by the individual with special needs. This type of trust is typically used in estate planning for special needs adults when they already had assets in their own name before their disability or when they receive an inheritance or a court settlement that could push their resources above the level to qualify for government benefits.

As with third-party SNTs, a trustee is appointed to distribute the funds to pay for expenses to support the individual with special needs during their lifetime.

Unlike third-party SNTs, however, once assets are transferred to the trust, they become irrevocable and generally have a “payback” provision upon the death of the individual with special needs. This means that any remaining assets left in the trust must be used to reimburse the state for the amount of government assistance provided during that person’s lifetime.

One restriction around funding a first-person SNT is that the individual with special needs must be under the age of 65. For those who exceed this age, however, another possible option to consider is a pooled special needs trust.

Pooled special needs trust (SNT)

A pooled trust is a kind of self-settled trust established and administered by a nonprofit organization. The pooled trust acts as a master trust, with separate sub-trusts maintained for separate trust beneficiaries. Each sub-trust qualifies as a self-settled SNT.  This allows the organization to manage a larger pool of assets in a more cost-efficient manner. 

Pooled trusts can be funded with assets owned by the individual with special needs or by another person on behalf of the individual with special needs. They’re an accessible option for those who have relatively small amounts of assets or are over the age of 65.

The use of ABLE accounts

In addition to special needs trusts, another helpful tool when advising clients with loved ones who are disabled is the ABLE (Achieving a Better Life Experience) account. ABLE accounts allow contributions from the account owner or their family members to help individuals with disabilities save for disability-related expenses without jeopardizing their eligibility for government benefits. 

ABLE accounts are available to individuals who are disabled presently and became disabled before the age of 26 and who are eligible for benefits under SSI or SSDI. Note that the Secure Act 2.0 increased the age of onset to 46 effective for tax years beginning after December 31, 2025. 

The contribution limit for ABLE accounts is $17,000 per individual per year in 2023. This contribution limit is also currently the same as the annual gifting exclusion, which means that clients can make a maximum contribution into an ABLE account for the beneficiary without incurring any gift taxes.

An ABLE account can be used in addition to a third-party SNT. From an estate planning standpoint, this allows clients who are looking to support a disabled loved one to also reduce the size of their taxable estate by transferring some assets into a special needs trust and some into an ABLE account.

Using life insurance in estate planning for special needs

What if you have a client who has a majority of their wealth tied up in less liquid assets such as business interests or personal property yet they still want to ensure they provide for their loved one with special needs after their death?

One of the estate planning strategies that clients often use to meet liquidity needs upon death is life insurance. However, in the case of special needs estate planning, life insurance must be used very strategically so that the individual with special needs doesn’t lose access to their government benefits. This can be done by not naming the individual with special needs as the beneficiary of the policy but instead naming a special needs trust as the beneficiary.  

Personal needs and preferences within special needs

While it can be easy to think of only the practical, document-driven side of estate planning for special needs adults and children, it’s just as important to consider the needs that are harder to quantify in terms of finances.

Tanya Frias, Chartered Special Needs Consultant (ChSNC®) and CFP® says:

“Most Estate planning attorneys can cover the technical aspects of estate planning for families with a dependent who has special needs. The one piece that tends to be left out is a “letter of intent or instruction.” This document should cover all of the qualitative areas of care for their family member. What doctors do they like or don’t like? What are the particular ways the dependent is comforted or made uncomfortable?

The little things the current caregiver knows are unique to their family member. The death of a caregiver is traumatic enough. Any additional information passed on about how to best take care of their family member can help with the transition.” 

In creating letters of intent or instruction, advisors can guide clients through questions that can help them think of contingencies and ways to make their loved one with special needs comfortable on a daily basis. 

This can include writing down what a typical day might look like for the beneficiary with special needs: 

• What fulfills them on a personal and emotional level? 
• What kind of relationships or social networks do they have? 
• What might be needed to nurture their sense of fulfillment or connection? 

Once clients answer these questions, use the answers to fill in the blanks within that client’s estate plan. If the client has not yet started on their estate plan, use our estate planning checklist to gather the most important pieces to get started.

Additional considerations in special needs estate planning

Understanding government benefits and special needs trusts can give advisors a leg up when serving clients who have an individual with special needs in their life. Additionally, advisors can guide clients through questions that can help assure that their wishes for the beneficiary with special needs are honored upon their death.

For example, in the case of estate planning for a child with special needs, a client who is a parent of a child with disabilities may want to be very specific in their instructions for who should be the legal guardian upon both parents’ death. Or let’s say that your clients want the beneficiary with special needs to always have a roof over their head without having to live in a government-assisted facility. In this case, they might consider funding the special needs trust with real estate that the beneficiary could live in. 

Use Vanilla to help clients illustrate what it would look like to utilize the special needs estate planning strategies mentioned above. Vanilla is an estate planning software for financial advisors who want to provide holistic advice by helping clients understand what will happen to their legacy and assets after they’re gone.