If you are fortunate enough to have enough resources to help family members, you should definitely seek legal advice before you take certain actions. There can be tax considerations and other complexities to navigate. This definitely enters the picture when it comes to providing assets for the benefit of a child or adult with special needs.
Government Benefit Eligibility
People with disabilities are going to need very costly medical care and treatment throughout their lives. For example, it has been estimated that the average lifetime cost of care for a person with autism is well over $2 million. This is just one example, but there are many other cases that involve significantly higher lifetime expenses.
Most people that have health insurance receive it through their places of employment, but a significant percentage of people with disabilities cannot work. Clearly, health insurance would be very expensive for someone that is going to incur these very hefty medical bills.
Fortunately, the majority of individuals with special needs qualify for Medicaid. This is a jointly administered federal/state government health insurance program for people with very sparse financial resources. In most states, the limit on countable assets is just $2000. However, here in New York where we practice law, the threshold is $15,150.
Some government programs are relatively self-explanatory, and Supplemental Security Income is one of them. People that qualify can receive a steady stream of modest income through this program, and a lot of people with disabilities that rely on Medicaid also receive Supplemental Security Income payouts.
Supplemental Needs Trusts
When you digest the above information, a logical picture coalesces in your mind: You cannot give a large gift to someone who is enrolled in these programs without causing a loss of eligibility. On the surface, this seems to be true, but there is a widely embraced solution.
Actually, when a disabled person comes into money for one reason or another, benefit eligibility does not necessarily have to be lost. A parent, a grandparent, a legal guardian, or a court could use the funds to establish a first party or self-settled special needs trust. These vehicles are alternately referred to as supplemental needs trusts.
The government benefits do not necessarily satisfy all of the needs of people that are receiving them. These unmet needs are referred to as supplemental needs, and this is where the name of the trust comes from. After assets have been conveyed into the self-settled trust, the trustee could use assets in the trust to satisfy unmet needs that are approved under program regulations. Eligibility would not be negatively impacted.
However, there is a huge negative. The Medicaid program is required to seek reimbursement from the estates of people that were enrolled in the program after they pass away. When a first party special needs trust has been established, assets that remain in the trust after the death of the grantor/beneficiary could be absorbed by Medicaid.
That’s the bad news, but the good news is that you could establish a third-party special needs trust for the benefit of a loved one. Everything would be the same with regard to the ability of the trustee to use assets in the trust to make the beneficiary more comfortable in certain ways.
However, when you establish the trust, you would name a secondary beneficiary to assume ownership of assets that remain in the trust after the passing of the first beneficiary. This beneficiary would assume ownership of the funds, and Medicaid would not be able to try to attach the remainder when recovery efforts are underway.
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We covered one very focused topic in this relatively brief blog post. If you would like to continue to build on your estate planning knowledge, we urge you to visit often, because we are constantly updating our blog with very useful, fresh information. Things change within the estate planning community, so it is wise to recognize the fact that you may need to update your existing plan.
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Frank Mazzagatti
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