Creating a plan to benefit a disabled child after your death, without causing the loss of vital government benefits, requires care.
Leaving a share of your estate outright to a disabled child could result in the child losing government benefits he or she is currently receiving from Medicaid or other sources. The inheritance becomes an “available resource” that must be spent down before the child will become eligible to re-apply for the government benefits.
Likewise, setting up a standard testamentary trust under which the trustee is directed to use income and/or principal for the disabled child’s health, support and maintenance will also endanger governmental benefits. The trust may also be subject to cost of care claims, Medicaid liens and Medicaid estate recovery at the child’s death.
The better alternative is a “special needs” or “supplemental needs” trust. Under this type of trust the trustee has total discretion on whether to expend any of the trust funds for the disabled child’s benefit. And, expenditures are limited to non-necessities and supplemental services such as dental, medical and drug expenses not provided through governmental benefits; physical, speech and occupational therapy; special equipment not provided by other sources; vacation and travel activities; social, recreational and entertainment opportunities; and/or training and education activities.
The total discretion granted to the trustee means the beneficiary has no legal right to demand distributions. As a result, the trust assets and income are not “available resources” and, therefore, don’t effect the beneficiary’s eligibility for governmental benefits.
Restricting the use of trust funds to items that will improve the quality of the disabled child’s life (non-necessities) protects the distributions from being deemed “in-kind” income that could reduce some government benefits.
An alternative to a separately managed special needs trust is the “pooled special needs trust”. These are established and managed by a nonprofit association, which maintains a separate sub-account for each beneficiary while pooling the assets for investment purposes. At the disabled beneficiary’s death, the remainder can either remain in the pooled trust to be used for other disabled beneficiaries of the trust, or be set up to distribute to the state an amount equal to the benefits provided by the state during the beneficiary’s lifetime, with the balance, if any, distributed to other family members.
The information in this article is provided as general information and is not intended as legal or tax advice. For advice and assistance in specific cases, you should seek the advice of an attorney or other professional adviser.