It is very important to consider the life situation of every person that is on your inheritance list. The right way to transfer assets to one loved one may not be appropriate for the next. With this in mind, a person with special needs is in a very unique position from an estate planning perspective.
Everyone needs health insurance, but obviously, it is absolutely essential for people with disabilities that will need lifelong care that can be extremely expensive. The majority of Americans get their health care coverage through their jobs, but a significant percentage of people with disabilities cannot work.
Paying for health care insurance out-of-pocket is simply not an option for most, but fortunately, a safety net exists in the form of the Medicaid program. People with disabilities typically rely on Medicaid as a source of health insurance, so a loss of this benefit would be devastating.
Since Medicaid is a need-based program, eligibility is determined based on the financial profile of an applicant. When approval has been granted, it is not necessarily permanent. An improvement in financial status could trigger a loss of Medicaid eligibility.
We should point out the fact that there is another need-based government program that is important for many individuals with disabilities called Supplemental Security Income (SSI). The purpose of this benefit is rather self-explanatory; it is a source of income for people with little to no personal earning power.
Once again, if a person that is eligible for SSI was to come into money for some reason, they could be disqualified.
Instead of leaving a loved one that is relying on these programs a direct inheritance, you could fund a supplemental needs or special needs trust. The individual in question would be the beneficiary, and you would name a person or entity to act as a trustee. There are professionals that offer trust administration services, and this can be the right choice for many families.
As long as the program rules are followed to the letter, the trustee would be allowed to use assets in the trust to make the beneficiary more comfortable in many different ways. This being stated, the beneficiary would not have the ability to directly access assets that been conveyed into the trust.
Technically, this is possible, and need-based government benefit recipients sometimes come into money through personal injury settlements as well. A parent, a grandparent, or a legal representative could use these assets to establish a trust on behalf of the disabled individual. This would be called a first party or self-settled special needs trust.
That’s the good news, but the bad news follows in the form of Medicaid estate recovery. Assets that remain in the trust after the death of the beneficiary could be absorbed by Medicaid during reimbursement efforts.
Conversely, when a special needs trust is established and funded by someone other than the beneficiary, it is a third-party trust. In the trust declaration, the grantor would name a secondary or contingency beneficiary to assume ownership of any remainder that is left in the trust after the death of the primary beneficiary. Medicaid would not be able to touch these assets.
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