Special Needs Planning

Third-Party Special Needs Trust

A Third-Party Special Needs Trust is created and funded by a “third party,” meaning anyone other than the individual with special needs. This could be the parents, grandparents, aunts, uncles, or even siblings of the individual living with special needs. A Third-Party Special Needs Trust is funded only with the assets of other individuals and is never funded with assets of the individual living with special needs. This trust is most often used to leave inheritance to the loved one with special needs in order to supplement the loved one’s lifestyle but not affect the loved one’s eligibility for government benefits.


OBRA ’93 Trust / First-Party Special Needs Trust

A First Party Special Needs Trust, also referred to as “self-settled special needs trust,” OBRA ’93 trust, or D(4)(A) trust, can only be created by the individual living with special needs, his or her parents, grandparents, legal guardian, or by a court, as mandated by federal law. A First Party Special Needs Trust is funded only with the assets of the individual living with special needs and must be created before the individual attains age 65. This trust is typically created when an individual living with special needs is left inheritance from a family member that did not know or understand that leaving such a gift could affect the loved one’s government-based benefits eligibility, or when the individual with a disability receives a settlement from a personal injury action. The distributions from a First Party Special Needs Trust are more restricted than those of a Third-Party Special Needs Trust, and upon the death of the beneficiary, any remaining funds in the trust must be used to repay state Medicaid benefits paid out on behalf of the beneficiary.


Pooled Special Needs Trust

A Pooled Special Needs Trust is funded with the assets of the individual living with special needs, however, this trust is appropriate when the individual’s assets are relatively small, which mitigates the benefits of a Special Treatment Trust. Pooled trusts are established and managed by nonprofit organizations and pool the assets of many individuals with special needs for investment purposes. Each contributing beneficiary is given a dedicated subaccount for distributions and upon the death of the beneficiary, any remaining funds in the subaccount must be used to repay state Medicaid benefits paid out on behalf of the beneficiary. Additional remaining assets are either kept by the pooled trust to benefit others or are gifted to a designated charity, depending on the rules of the pooled trust. Third-party assets can also be contributed to a pooled trust for the benefit of an individual with special needs and are not subjected to the state Medicaid payback provision.


ABLE Account

An ABLE account is an investment account only available to eligible individuals with disabilities, which functions similarly to a 529 college savings account. ABLE Accounts allow individuals with disabilities to save and invest money without losing eligibility for certain government-based benefit programs. Earnings from investments are not subject to income tax as long as the money is distributed only on “Qualified Disability Expenses.” Qualifying expenses are defined by state statutes but are generally broad in scope an directly relate to the underlying disability. Anyone can contribute to an individual’s ABLE Account, however the amount that can be contributed annually to the account is capped and once the total amount of assets held in the ABLE Account reaches a certain amount, government-based benefit eligibility can be suspended or reduced.

Though the California ABLE Act was ratified by state legislature in 2015, California’s ABLE Account program went live on December 18, 2018. Californian citizens can also utilize another state’s ABLE program. Individuals should compare different state ABLE Account programs and determine which state’s program best suits an individual’s specific needs. This link is a great starting point to compare programs: http://www.ablenrc.org/state-review.