Leaving an inheritance to a loved one with special needs who is or will be receiving government benefits (SSI, medical assistance, long term care services) is tricky and can have unintended negative consequences if not done carefully. Well-meaning gifts may result in the loved one (who I will refer to as the “Special Needs Beneficiary”) losing their benefits if the amount of the inheritance puts the Special Needs Beneficiary over program eligibility requirements. Options exist to proactively plan to leave an inheritance to a Special Needs Beneficiary. However, even if planning didn’t occur the way one had wished, all hope is not lost.
The Proactive Approach
As difficult as it may be, open communication and dialogue regarding the best way to provide a financial gift to a Special Needs Beneficiary is critical. One of the best options for family and friends is to leave funds in a third-party special needs trust, so the gift in trust will not be counted as the individual’s resource. A third-party special needs trust is a trust created from the funds of someone other than the Special Needs Beneficiary, and never given directly to the Special Needs Beneficiary (i.e. Grandma and Grandpa leave money in a trust for their grandchild who is a Special Needs Beneficiary). Alternatively, if a third-party trust isn’t a viable option, utilizing a pooled special needs trust (as described below) may be something to consider. In either circumstance, consideration should be given to how you can communicate to others that they are also allowed to contribute to the trust. Methods of communicating to family may include simply having conversations or drafting a letter to explain that a trust has been created for the Special Needs Beneficiary. The letter can provide instructions on how to leave assets to the trust while simultaneously clarifying that the intent is not to solicit gifts, but to distribute information to avoid unintended consequences that could result in the loss of public benefits.
Ready or Not, Here Comes the Inheritance
Sometimes being proactive is not possible. A Special Needs Beneficiary may be listed as a beneficiary on an account with a payable on death (POD) designation. Others may list the Special Needs Beneficiary as a beneficiary in their will or trust. The intent was for the Special Needs Beneficiary to receive additional funds to better their life and increase their happiness, not jeopardize their benefits. However, the outcome may be that benefits are in jeopardy if action isn’t quickly taken.
In these circumstances, the Special Needs Beneficiary is personally inheriting assets. There are several options that allow the Special Needs Beneficiary to retain his or her benefits while still being able to use the inherited funds when necessary. I will focus on two of those options:
1. Creating a first-party special needs trust, and
2. Placing the funds in a pooled special needs trust.
What’s a First-Party Special Needs Trust?
A first-party, or self-settled, special needs trust is designed to hold a Special Needs Beneficiary’s own assets (i.e. the inheritance). A trustee will manage the trust and make distributions to the Special Needs Beneficiary during his or her lifetime. While the Special Needs Beneficiary is living, the funds in the trust are used for their sole benefit. When the Special Needs Beneficiary dies, any assets remaining in the trust will be used to reimburse or “pay back” the government for the cost of medical care received. No additions can be made to the trust after the Special Needs Beneficiary reaches 65 years of age.
What’s a Pooled Trust?
A pooled special needs trust is an alternative to the first-party special needs trust. Essentially, a nonprofit organization, such as Wispact or Life Navigators in Wisconsin, creates a trust that allows a Special Needs Beneficiary to “pool” his or her resources with those of other individuals who have special needs. Pooled special needs trusts provide professional trustee and investment services, while maintaining separate sub-accounts for each Special Needs Beneficiary. Pooled trusts are ideal for trusts with limited assets and for individuals who do not have a support system that includes an individual who is willing and able to act as the trustee. Like the first-party special needs trust, when the Special Needs Beneficiary dies, the funds remaining in the sub-account will reimburse or “pay back” the government for the cost of medical care they received.
Who can help me get this all straightened out?
Whether you are being proactive and looking to plan for the future, or you are in a predicament and need help to find a solution before benefits are impacted, talking to an elder law and special needs attorney to determine the best options for you or your family is important. Many factors come into play when assessing options and choosing if a trust or other option is the right path to take. You want an attorney who can assist you in analyzing what is best for your individual situation.