I had a client come in this week who was the Social Security Payee for her disabled daughter. Her daughter was on Social Security Disability, Medicare and Medicaid. The father of her daughter recently passed away and was leaving a sizable inheritance to daughter. Mom wanted to know about her daughter’s options for the inheritance. After the consultation, I said this would make a great topic for this week’s column and mom agreed. So today, we will be discussing the various options that special needs individuals will have upon the receipt of inheritance from their parents or other loved ones.
If the family did no planning, upon receipt of the inheritance, daughter would be immediately disqualified for Medicaid because she had too many assets. The inheritance generally would not affect daughter’s Social Security Disability since there are no asset limits with Social Security Disability. However, had daughter been on Supplemental Security Income instead of Social Security Disability, the inheritance would have disqualified her from Supplemental Security Income since she would also have too many assets. Once off of Medicaid and Supplemental Security Income, daughter would have to use up the inheritance on medical and other expenses until it is spent down to the asset limits, typically $2,000. Once the inheritance is spent down, daughter could then reapply for Medicaid and Supplemental Security Income.
Financial power of attorney.
In this case, daughter never had a guardian or conservator. Daughter was not deemed mentally incapacitated, but didn’t manage her own finances. Between mom as Social Security Payee and daughter’s abilities, all of daughter’s financial and medical needs have been met and decisions made, without the necessity of court approvals of a guardian or conservator. And if daughter has enough capacity to understand who her family is, what assets she owns, who she wanted to benefit, and that a financial power of attorney allowed someone else to handle her finances, she would be able to execute a financial power of attorney. This would allow mom to handle daughter’s finances, collect her income and pay her bills.
However, there are three big disadvantages to using a financial power of attorney in this situation. Firstly, it doesn’t stop daughter from acting as her own financial agent and accessing the accounts and spending the funds. Since daughter lacked money management skills, this could be very tempting. Secondly, daughter can revoke the financial power of attorney at any time. It lacks any type of permanent protection; if daughter revokes it, she no longer has a financial agent and is then in charge of her own finances which is what would offer a little protection for daughter. Lastly, just like with no planning, daughter would be disqualified from Medicaid and Supplemental Security Income until the assets were spent down to the asset limit level and then she would have to reapply for Medicaid and Supplemental Security Income.
Mom could petition the probate court, with or without daughter’s consent, for a conservatorship to manage daughters finances. This would have a high likelihood of being granted because daughter lacks the ability to manage her own finances, which would be dissipated if daughter took control. Mom and the court would be in control. Although a conservatorship does offer great protections for the funds and finances for daughter, the conservatorship also has more disadvantages and more restrictions on the funds than most of the other options we are discussing today.
Firstly, the conservatorship hearings and files are generally open to the public at the probate court. Anyone can watch the hearing or review the file. Secondly, the conservatorship would generally be supervised by the probate court for daughter’s lifetime so long as there are still funds unspent. The conservator must file annual accounting with the probate court for its review. It is not uncommon for the probate court to place restrictions on the amounts that the conservator may spend without court approval, such as no more than $200 per month or $1,000 per year over and above the normal monthly recurring expenses. If mom wanted to buy some new appliances for daughter’s home or fix daughter’s roof, mom would have to file a petition with probate court and ask the judge for permission for those expenditures. Lastly, just like with no planning and a financial power of attorney, daughter would be disqualified from Medicaid and Supplemental Security Income until the conservatorship assets were spent down to the asset limit level and then she would have to reapply for Medicaid and Supplemental Security Income.
First-party special needs trust.
Mom could take some action before daughter receives the inheritance from dad’s estate. Mom could set up what is called a first-party special needs trust. This is called a first-party special needs trust because it uses a special needs beneficiary’s own assets. Although this trust can be set up directly by certain relatives, we usually use the probate court to set up these trusts in order to get court approval and give notice to the world that we are seeking this type of protection. Once set up and funds deposited, mom as trustee and her co-trustee(s), if any, are the only ones who are authorized to handle the trust funds for the benefit of daughter. Daughter has no power to revoke the trust without petitioning the probate court.
In most instances once the trust is set up, there’s no longer any court supervision. However, annual accountings are still needed to be provided to at least the beneficiary. In addition, there are annual trust tax returns because it is considered a separate tax-paying entity. The trustee(s) have full access to the funds to be used for the benefit of the beneficiary.
The biggest advantage of a first-party special needs trust is that the assets in the trust do not disqualify daughter from Medicaid, Supplemental Security Income or most other governmental benefits that have an income or asset test. There is however, one big downside of a first-party special needs trust, if there’s anything left in the trust after the death of daughter, it must be paid back to the governmental entities providing Medicaid and/or other governmental benefits. This is why this first-party special needs trust is sometimes referred to as a Medicaid pay-back trust.
Pre-planning for gifts and inheritances with a third-party special needs trust.
If mom wants to make a current gift or leave an inheritance to daughter she could have her cake and eat it too. Mom can make a gift or leave an inheritance to daughter in a third–party special needs trust without disqualifying daughter from Medicaid, or other income or asset-based governmental benefits such as Supplemental Security Income. This is called a third-party special needs trust because it uses a third-party’s assets, not the special needs beneficiary’s own assets.
A third-party special needs trust has all the benefits of a first-party special needs trust. Once set up, mom as trustee and her co-trustee(s), if any, are the only ones who are authorized to handle the trust funds for the benefit of daughter. Daughter has no power to revoke the trust without petitioning the probate court. There’s no court supervision. The assets in the trust do not disqualify daughter from Medicaid, Supplemental Security Income or most other governmental benefits that have an income or asset test. The biggest benefit of a third-party special needs trust is that if there’s anything left in the trust after the death of daughter, it does NOT have to be paid back to the governmental entities providing Medicaid and or other governmental benefits. Mom can leave it to anyone she wants.
What to do?
In most instances, the best protection for your special needs loved one is a stand-alone first-party or third-party special needs trust that only provides for your special needs loved one. This stand-alone special needs trust should not be included within your revocable living trust and would have only the minimum provisions required to prevent the trust assets from being considered for any income or asset-based governmental benefits, but still provide for your special needs loved one. 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 April 15, 2018 in The Times Herald newspaper Port Huron, Michigan as: Protecting special needs inheritances