Last week, we discussed protecting your special needs child or other loved one who is developmentally disabled and/or legally incapacitated. As we talked about, if you are your loved one’s primary caregiver or caretaker, proper planning dictates that you designate your successors and that you properly train them for the job. This week we will discuss making gifts or leaving inheritances to your loved one without disqualifying him or her from governmental benefits.
As a result of your loved one’s disability or incapacity, he or she may be on some form of governmental assistance such as Supplemental Security Income or Medicaid. These programs, like many governmental assistance programs, may have asset and/or income limits. If the limits are exceeded, the benefits are cut off.
If your loved one receives a lump sum directly into his or her name, such as from a gift, an inheritance or a personal injury award, that lump sum will usually disqualify your loved one immediately from his or her governmental benefits. Your loved one would then have to spend down all of that lump sum to nominal amounts before he or she could reapply for those benefits.
Pre-planning for gifts and inheritances. When you want to make a gift or leave an inheritance to a special needs child or other loved one, you can have your cake and eat it too. You can make the gift or leave the inheritance to your special needs loved one in what is generally called a third-party special needs trust. With a third-party special needs trust, what you leave to your loved one will not be counted against him or her for income or asset limited governmental benefits.
This special needs trust would be drafted in such a manner to pay for things which are not covered by the governmental benefits. Typically the governmental benefits provide for the basic necessities of life such as food, shelter, clothing and/or transportation. The assets in your loved one’s special needs trust are used for non-necessities or other items that are not covered by the governmental benefits.
The trustee would have sole and absolute discretion to distribute income and/or principal for these extra or special needs of your loved one. These special needs could include, among other things, vacations, a TV, field trips, eating out in a restaurant or going to a play. The trust would fund these additional activities that can enhance the life of your loved one and make his or her life more meaningful.
For example, in one case, a special needs child loved going to plays. Mom, during her lifetime, would take her daughter to New York once a year to see a Broadway play. Mom wanted this tradition to continue after Mom was no longer able to travel, so Mom set up a special needs trust to provide for her daughter. The special needs trust had a provision to direct the trustee to pay for the daughter’s expenses to travel to New York once each year to go see a Broadway play. Now that Mom is gone, the trip to New York to see a Broadway play, now with Auntie, is still a major annual event in the daughter’s life.
Similarly in another case in which a special needs child loved going to Detroit Tiger baseball games. Dad left a provision in a special needs trust directing the trustee to pay for his son and a companion to attend Tiger games, including opening day. This tradition continued long after Dad died.
Instead of setting up a stand-alone special needs trust, you may be tempted to just add special needs language for the benefit of your special needs loved one in your revocable living trust. You may want to do this because it initially seems more economical. Don’t give in to this temptation, because it may cost your special needs loved one more later.
In a typical revocable living trust, there would be many additional provisions, such as providing for you and your spouse during your lifetimes or distributions to children or other beneficiaries. Any provisions such as these, which are unnecessary to the special needs trust, could be used by the governmental program administrators to count all of the trust assets as resources available to your special needs loved one that are required to be spent down.
Usually, the best protection for your loved one is a stand-alone special needs trust that only provides for your special needs loved one. This stand-alone special needs trust would have only the minimum provisions required to prevent the trust assets from being available for spend down, but still provide for your special needs loved one.
Protecting your special needs loved one’s own assets. You may find your special needs loved one in a situation in which he or she has already received a gift, inheritance or even a personal injury award that has disqualified him or her from the governmental benefits. What you may not know is that your loved one does not have to spend down all of those assets for his or her care and support before he or she can reapply for those governmental benefits.
There are provisions in both federal and state statutes and regulations that are friendly to special needs individuals. You can set up a certain special needs trust that is commonly called a Medicaid pay-back special needs trust. This type of trust is typically established by court order.
Once the trust is set up, all of your loved one’s excess assets are then transferred into that trust. After the excess assets are transferred to this Medicaid pay-back special needs trust, your loved one then qualifies and reapplies for the governmental benefits.
This Medicaid pay-back special needs trust is very similar to the third-party special needs trust you would set up to hold your gift or inheritance to your loved one. Both types of special needs trusts would be drafted in such a manner to pay for extra or special needs of your loved one which are not covered by the governmental benefits.
However, when you are going to be using your loved one’s own assets to fund a Medicaid pay-back special needs trust, you must include a pay-back provision in the trust. This pay-back provision provides that, after the death of your loved one who is the beneficiary of a special needs trust, the remaining assets in the trust are used to pay-back or reimburse the governmental program for the lifetime benefits paid by the program for the benefit of your loved one.
For example, in the case of one Medicaid pay-back special needs trust we set up, some assets of the trust were used by the trust beneficiary for a once in a lifetime trip to Walt Disney World in Florida. The beneficiary had always dreamed of going to Walt Disney World, but could not go previously because she never had the funds to do so. Luckily, she made the trip less than a year before she passed away.
With a special needs trust, you can have a happier special needs loved one, enrich his or her life and make it more enjoyable and fulfilled.
By: Matthew M. Wallace, CPA JD
Published edited March 8, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Providing for loved ones who have special needs