Creating an Estate Plan that Benefits a Child with Special Needs

February 22, 2021

Children with disabilities may require more financial assistance and on-going personalized care that requires significant planning and structure. Most parents find that a special needs trust is their best option for accomplishing their goals to provide continued assistance. There are many benefits to having a special needs trust in place. The main benefit being that the child is permitted to receive assets such as gifts, inheritances and other income while retaining their eligibility for certain government benefits such as Medicaid and Supplemental Security Income (SSI).

There are three main types of special needs trusts:

First-Party Trust

A first-party trust is designed to hold the beneficiary's own personal assets. The funds in the trust will be used for the beneficiary’s benefit during his or her lifetime and then when the beneficiary passes away any remaining assets will be used to reimburse the government for the cost of medical care. These trusts are useful for beneficiaries who are receiving Medicaid SSI or other government benefits and who come into large amounts of money such as an inheritance or a lawsuit settlement. The trust allows the beneficiary to retain their benefits while still being able to use their own assets when necessary.

Third-Party Trust

A third-party special needs trust is most often used by parents or other family members who want to financially contribute to a loved one with special needs. A third-party trust functions like a first-party special needs trust in that the assets held in the trust do not prevent a beneficiary from receiving certain government benefits, but a third-party special needs trust does not contain the payback provision found in the first-party trust. This means that any funds remaining in the trust can pass to other family members or to charity when the beneficiary passes away without those assets having to be used to reimburse the government.

Pooled Trust

A charity essentially sets up a pooled trust that allow beneficiaries to pool their resources with those of other trust beneficiaries for investment purposes while still maintaining separate accounts for each beneficiary's needs. When the beneficiary passes away, the funds remaining in the account reimburse the government for care but a portion also goes towards the nonprofit organization responsible for managing the trust.

Adding Life Insurance to the Mix

In addition to setting up a special needs trust it is also advisable to consider a second-to-die life insurance policy. This type of policy only pays out after the second parent dies and it has the benefit of lower premiums than regular life insurance policies. A life insurance policy can pay directly into a special needs trust and it does not have to go through probate or be subject to estate tax. List the name of the trust on the beneficiary designation, not the name of the person with special needs. Using a life insurance policy helps to guarantee future funding for the trust after the parents die while keeping the parents’ estate intact for other family members.

Setting Up an ABLE Account

Finally, consider setting up an ABLE account. ABLE stands for Achieving a Better Life Experience and these accounts were created by Congress in 2014. Modeled after 529 plans for higher education, ABLE accounts allow people with disabilities to set aside up to $15,000 per year in tax-free savings accounts without affecting their ability to qualify for government benefits. To qualify the person with disabilities must have become disabled before his or her 26thbirthday. There are many limitations and regulations with these accounts so discuss it thoroughly with your estate planning attorney to make sure it fits in with the comprehensive plan.

For more information on creating an estate plan to benefit a child with special needs, contact the experienced attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling (443) 470-3599or emailing us at

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