An important consideration for people who have a beneficiary with special needs in California is whether to set up a special needs trust or an ABLE account. These are two possible estate planning strategies to consider. You probably don’t want to leave them an inheritance through your will because that could disqualify them for government benefits.
Special needs trust
This type of financial account is often essential for special estate planning needs. A special needs trust doesn’t limit you on how much you can deposit into the account. Another benefit of an SNT is that creditors can’t stake a claim to it. One of the problems with leaving behind property through a will is if you have debts, then creditors could take part of your estate regardless of what your wishes were in your will. Irrevocable trusts like the SNT are safe from lenders who are trying to collect what you owe them. Winners of a lawsuit against you or your beneficiary also won’t be able to touch the assets from a special needs trust.
You could open an ABLE account for someone who became disabled before the age of 26. Gains on the assets in the account and distributions are tax-free. It’s only the initial contributions that may be subject to taxes. The beneficiary can use the money from an ABLE account to pay for qualified disability expenses (QDEs). These expenses include housing, food, transportation, health care, prevention and wellness, financial management and administration services, legal fees and funeral and burial costs. The major drawback of an ABLE account is you can only deposit up to $16,000 into the account each year. This number may change to account for inflation.
Special needs trusts and ABLE accounts are estate planning strategies that allow you to pass on assets to loved ones who have special needs. One of the main differences between the two financial accounts is there is no limit on how much you can deposit into an SNT, but there’s a yearly limit on deposits into ABLE accounts.