On occasion, we have an estate planning client suggest that the client needs to exclude a child or grandchild from benefitting under the client's estate plan because that child or grandchild receives Medicaid or is on disability. The client believes that if the child or grandchild benefits under the estate plan in any way, the Medicaid or disability benefits will be lost. While it is certainly possible to exclude a special needs child or grandchild as a beneficiary, the special needs individual will not necessarily lose benefits if that individual is a beneficiary of a well-crafted estate plan.
Third-party special needs trusts are trusts which are created and funded by someone other than the special needs individual. These trusts are designed to benefit the special needs individual in a manner that would not cause him to lose his benefits. The very language of the trust provides that the assets are held in trust for the benefit of the individual and prohibits distributions that would cause the beneficiary to be disqualified from receiving government benefits. It is important that the assets are held in trust and not distributed outright to the beneficiary. When this type of trust is being administered, it is important for the trustee to become educated about the particular programs for which the beneficiary is eligible. The trustee would only make distributions which would not adversely affect the benefits which the beneficiary otherwise would receive.
Most often a special needs trust is created for a beneficiary as part of a client's revocable trust. For example, if a client has three children, one of whom has special needs, then the client may choose to have the client's revocable trust split into equal shares following his death and the share for the special needs child would be held in a special needs trust. The shares for the other children may pass to them outright. During the special needs child's lifetime, only that individual is the beneficiary. The third-party special needs trust can provide that any assets remaining in the special needs trust may pass to the other children or to other beneficiaries upon the death of the special needs beneficiary.
What if a special needs beneficiary receives an inheritance outright? It is possible for the special needs beneficiary to create a self-settled special needs trust and to transfer the inherited assets into the special needs trust. Assets held in self-settled special needs trust can be used for the benefit of the beneficiary in a manner that will not cause the beneficiary to lose his or her benefits. There are several specific requirements for a self-settled special needs trust. Possibly the most significant difference between a third-party special needs trust and a self-settled special needs trust is that following the death of the special needs beneficiary, the assets remaining in a self-settled special needs trust must repay the government for benefits paid during the lifetime of the beneficiary.
If you have a special needs individual who you would like to benefit in your estate plan, it is possible to provide for that beneficiary in a manner that will not cause the beneficiary to lose his or her benefits. Call the office if you would like to schedule an appointment to discuss these issues as they apply to your situation.