My Disabled Son is Going to Receive an Inheritance and Lose His Government Benefits â What Can We Do?
Mary calls with the following problem. Her father recently passed away and left a sum of money to each of his grandchildren, including Maryâs son, John. âSo, whatâs the problemâ, you ask. John is 25 and mentally challenged. He is disabled, doesnât work and receives Medicaid. Mary is concerned because she heard that receiving the inheritance will cause John to lose his benefits. Sheâs correct if Johnâs assets exceed $2000. âIs there anything that can be done?â she asks desperately.
The answer is to set up a special needs trust, but the timing of doing so is critical. The law has established certain safe harbor trusts that allow recipients of Medicaid and other needs based government benefits to keep those benefits and place their assets into a trust to be used for their âspecial needsâ. These trusts, however, have very technical and specific rules surrounding their set up and administration.
For example, the trust must be irrevocable and established by a parent, grandparent, guardian or court. The disabled individual cannot set it up him/herself. The trust must provide that the disabled individual is the only beneficiary and that the assets can only be used for special needs and not for food, clothing or shelter. The trust may also need to include a âpayback provisionâ, which states that any assets left in the trust when the beneficiary dies will be used to pay back government benefits first. Oh, and the trust cannot be set up if the disabled person is over the age of 65. These are just some of the many restrictions and requirements.
So, letâs go back to Mary and her problem. We can absolutely place Johnâs inheritance in a special needs trust. It probably is best to have the court act as the grantor so weâll need to make an application to the court. It is also important that we do this before assets are ready to be distributed from the grandfatherâs estate. Once the inheritance is made available to John he may lose some months of benefits before the court establishes the trust. He doesnât actually have to receive the assets for them to âbe availableâ. A typical estate can take several months or longer to administer so while the executor is gathering estate assets and paying debts and taxes is the best time to get the trust set up.
Keep in mind that the laws in this area are very technical so it is always best to hire an elder and disability attorney who is very familiar with these types of trusts. And, where possible, it is better for the family member leaving assets to the disabled relative to set up a special needs trust in his/her will or leave the gift to a trust that already has been established by another family member. That is what we call a âthird party special needs trustâ, but thatâs a discussion for another day.