If you are leaving an inheritance to someone with a disability, this could affect his or her government benefit eligibility.
Many people with disabilities rely on Medicaid for health insurance, and some receive income through the Supplemental Security Income (SSI) program. We are often asked if people in this situation will lose their benefits if they receive a direct inheritance?
The answer is yes, but only if the inheritance is large enough to trigger loss of eligibility. Fortunately, there is another solution that can provide the best of both worlds.
Supplemental Needs Trust
If you want to leave something to a person with a disability, you can establish a supplemental needs trust to provide for that loved one that will not affect government disability benefits. These trusts are often referred to as “special needs trusts” and the terms can be used interchangeably.
When you establish the trust, the attorney will ask you to name someone to serve as trustee to act as its administrator. Any adult can serve as the trustee, and you can even serve yourself, but this may not be the best answer if you are using the trust for estate planning purposes.
If you do not have someone you feel is a suitable candidate to serve as Trustee, you can use a professional fiduciary.
Trust companies and the trust departments of banks provide trustee services. While there is a fee, it is often the best choice because of their competency and accountability safeguards.
The beneficiary will not be able to reach the assets directly. Instead, the trustee uses the trust assets to meet the beneficiary’s needs. If the beneficiary is receiving SSDI, the Trustee is not limited in the use of the funds. If, however, the beneficiary is receiving SSI benefits, there is an important exception. That is, the Trustee may not pay for food or shelter or this could affect the government benefits.
Even if trust funds are used to pay for food and shelter, there might not be a complete loss of benefits. The beneficiary might lose as much as one-third of their SSI benefit, and Medicaid eligibility would remain intact.
If the beneficiary is a child, the trust can even buy a home for the beneficiary to live in and it would not cause a loss of benefits.
Medicaid Estate Recovery
There is a Medicaid estate recovery mandate, so Medicaid will go after assets remaining in a deceased beneficiary’s estate. With the exception of a home, a disabled person cannot qualify for Medicaid if he or she has significant assets, so the cupboard is usually bare in these situations.
If a third-party special needs trust is in place, the scenario is different because assets may remain in the trust after the death of the beneficiary. A third-party special needs trust is one you establish using our own funds and not the funds of the beneficiary.
When you draw up such a trust, you name a successor beneficiary or beneficiaries to receive whatever remains in the trust at the death of the special needs beneficiary. When the primary beneficiary dies, the successor(s) inherit what remains. Medicaid cannot touch these assets.
If a person with a disability acquires money while benefits are being paid, those assets can go into a first-party supplemental needs trust. This first-party or self-settled trust operates much the same as a third-party trust regarding the trustee’s latitude to use the assets to improve the beneficiary’s life without impacting benefit eligibility. The downside is that any assets remaining in the trust at the beneficiary’s death are subject to Medicaid estate recovery.
Attend a Free Webinar!
If you want to learn more about the estate planning process, attend one of our upcoming webinars. We get great feedback from participants and there is no charge, so this is a minimal investment of time that will yield dividends.
You can see the dates of upcoming events if you visit our Oklahoma City estate planning webinar page. If you decide to join us, follow the instructions to register and we will reserve your spot.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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