There are different ways to get assets into the hands of someone after you pass away. A method that is acceptable for one person may be disastrous for another. With this in mind, lets look at inheritance planning for people with disabilities and the special needs trust.
Need-Based Government Benefit Eligibility
In the United States, most people that are not senior citizens get their health insurance through their employers. A significant percentage of individuals with special needs are not in a position to work, so this is not an option for them.
Obviously, these folks need health care insurance, and there is a solution the form of the Medicaid program. This is a need-based federal/state government funded program that provides health insurance for people with very limited resources.
You cannot qualify if you have more than $16,800 in countable assets in your name, but a home is not considered to be a countable asset. However, there is an equity limit, and it stands at $955,000 this year.
In addition to the health care coverage that they receive through the Medicaid program, people with disabilities with limited resources can qualify for Supplemental Security Income (SSI).
Once eligibility for these programs has been granted, it is not necessarily permanent. Someone that comes into money could potentially lose their benefits, and this is something to take very seriously if you have someone with a disability on your inheritance list.
Special Needs Trust
There is an ideal solution in the form of a special needs trust. To implement this strategy, you fund the trust, and you name a trustee to act as the administrator. It cannot be the beneficiary, but any adult that is willing to assume the role can technically act as the trustee.
If you do not know anyone personally that would be a good candidate, you have recourse. Trust companies and the trust departments of banks provide trustee services for a fee, and this can be the right choice under some circumstances.
The government benefits are supposed to cover health care expenses, food, and shelter. This is somewhat unrealistic, because the maximum SSI payout in 2022 is $841.
Under the rules of these programs, the trustee could use the assets to provide anything other than food and shelter, and there would be no penalty at all. For expenditures that are used for these necessities, there is a maximum penalty of one third of the benefit plus $20.
Medicaid Estate Recovery
Medicaid will look into the estate of a deceased beneficiary, and if they are in direct possession of valuable property, Medicaid can attach the resources. This is called the Medicaid estate recovery process.
In most cases there will be nothing for them to take with the possible exception of a home that was in the direct personal possession of the decedent.
The dynamic is somewhat different when a special needs trust has been established for a person with a disability.
If the funding is coming from someone other than the beneficiary, it is a third-party trust. After the death of the first beneficiary, the successor beneficiary that is named in the trust declaration would assume the role, and the assets would be protected from Medicaid estate recovery.
A person with a disability will sometimes come into money from a personal injury settlement or judgment or from another source. The funds could be used to establish a first party or self-settled trust.
When a first party trust has been established, the remainder would be accessible to Medicaid during the recovery phase. This is why you would not want to leave a direct inheritance to someone with the idea that they could establish a self-settled trust.
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