With approximately one in six children in the United States between the ages of 3 and 17 diagnosed with a disability, practitioners will increasingly serve clients who wish to leave assets to a family member with special needs. Comprehensive planning for the transfer of assets to a beneficiary with a disability requires not only a focus on maximizing the longevity of those assets by ensuring the assets are in a protective arrangement, but also a broader discussion on who will provide future daily care for the beneficiary, where such care will be provided, and the expenses related to such care. Understanding the financial and personal needs of the beneficiary allows the practitioner to identify the client's goals and provide recommendations that alleviate anxiety regarding the care a loved one will receive when the client is no longer able to manage such care.

The four main methods of transferring assets to a beneficiary with a disability include: funding a third party-funded special needs trust; opening an ABLE account; a transfer to someone other than the individual with disabilities to hold and use for the benefit of such individual; and an outright gift to the beneficiary. The following questions will guide the practitioner in recommending an appropriate method of transfer:

  • Does the beneficiary currently receive any means-tested government benefits, such as Supplemental Security Income (SSI) or Medicaid, that limit the amount of assets permitted in the beneficiary's name?
  • Will the beneficiary receive any means-tested government benefits in the future?
  • Is the beneficiary able to make his own legal decisions?
  • If the beneficiary is competent, is he able to manage and access his own monies in an independent manner or with the assistance of a trusted individual?
  • Where will the beneficiary reside when the current caregiver is no longer able to provide adequate care?
  • What is the cost of such care?
  • Who will pay for such care?

An affirmative answer to any of the first four questions triggers consideration of a third party-funded special needs trust (TPSNT) to hold assets passing to the beneficiary from any source. By far the most common method of transferring assets to an individual with a disability, a TPSNT is typically established in combination with an estate plan as either an intervivos or testamentary trust. Assets held in the trust are excluded for SSI and Medicaid eligibility purposes and allow the beneficiary to maintain funds for his supplemental use while continuing to receive means-tested benefits.

A TPSNT must include certain requirements to qualify as an excluded resource. The settlor must clearly intend for the trust to supplement and not supplant government benefits and consider such benefits prior to a trust distribution. The trustee must have total and absolute discretion to pay income and principal for the beneficiary's special needs. Cash should not be distributed directly to the beneficiary. Drafters should avoid restricting specific distributions even if they would reduce the beneficiary's SSI. Paying rent from the trust, for example, will reduce, but not eliminate, SSI, and emergency situations may require temporary rental assistance from the trust. The beneficiary may never serve as trustee and should not contribute any of his own monies to the trust.