Caring for someone with special needs is both a burden and a privilege. The challenges can be all-consuming, but the rewards are often deeply gratifying. Few of us who don’t bear this burden can fully understand the level of commitment required.
For many caregivers, this commitment extends to remembering the disabled person in their wills. This is a commendable impulse, but it is important to proceed cautiously. Without proper planning, an inheritance left to someone on government assistance can lead to nothing short of disaster.
The difficulty stems from the nature of public assistance itself. Some benefits, such as Medicaid and Supplemental Security Income (SSI), are “means-tested.” This means they are available only to disabled person whose assets are below a certain level. Leaving any kind of inheritance to someone who receives means-tested assistance can cause these benefits to be taken away. And for a disabled person, government benefits can be critical.
A little background: SSI is a federal program administered by the Social Security Administration that pays monthly stipends to people who are elderly or disabled. Medicaid, for its part, provides health care benefits and many other programs that can enhance a disabled person’s quality of life. Importantly, Medicaid coverage is automatically granted to individuals receiving SSI in Maryland and many other states.
A special-needs trust supplements a disabled person’s public benefits without putting those benefits in jeopardy.
Under Social Security rules, a disabled person with more than $2,000.00 in assets cannot receive SSI and therefore will not qualify for Medicaid. As a result, leaving a bequest to a disabled person can do more harm than good.
This problem can be circumvented by setting up a special-needs trust. This type of trust includes language that requires the trustee to pay only for items the government isn’t already paying for. In this way the trust supplements a disabled person’s public benefits without putting those benefits in jeopardy.
Because the beneficiary cannot compel the trustee to make a distribution, the government does not take the trust assets into account when determining whether the beneficiary qualifies for public assistance. In other words, a special-needs trust creates the illusion of poverty, which allows someone with special needs to receive an inheritance while leaving their government benefits intact.
Choosing the right trustee is essential. In addition to having the beneficiary’s needs at heart, this person must understand special-needs trusts and their rather arcane rules. For example, the trustee may not pay for the beneficiary’s food or shelter, unless they are enjoyed while the beneficiary is away from home—say, on a vacation. Sending the beneficiary a gift card is also not allowed, unless it’s for an establishment like a gas station that sells only things that are allowable expenses under the trust rules. The prudent trustee will consult with an attorney to avoid any missteps.
A special-needs trust is typically set up through the caregiver’s will. Called a “testamentary trust,” it can be funded with the caregiver’s ordinary assets like bank accounts and real estate. In addition, the trust can be named as the beneficiary of the caregiver’s life insurance policy or retirement account.
Another approach is to establish the trust in the caregiver’s lifetime. This type of trust, called an inter vivos trust, can be funded with contributions from the caregiver directly or from friends and family of the beneficiary. These individuals can also name the trust as a beneficiary of their wills and other assets.
Whether a testamentary or inter vivos trust is to be established, the assistance of an attorney is essential. The tax implications of setting up a special-needs trust are numerous and complex, and the laws affecting trusts in Maryland have recently changed. Properly prepared, however, the trust can be an essential legacy to help someone with special needs.