How to prevent your estate plan from jeopardizing the benefits of a disabled heir

Estate planning is not a requirement. No one can force you to write your will, create a power of attorney, or own your property in such a way as to avoid probate. As a result, people too often let common estate planning excuses get in the way.

For those who don’t plan, states have default laws to manage the transfer of their property and assets upon death or to control their property if they lose this ability due to serious injury or advanced age.

However, these laws should be seen as a back-up plan and not an ideal arrangement, especially if you have a disabled family member. By relying solely on the default laws of your state’s probate or guardianship code without considering the current or potential eligibility of your heirs for certain benefits, you could unwittingly prevent your disabled child or grandchild from receiving public benefits, or those benefits could be significantly reduced . Thoughtful planning on your part can create additional benefits for your heirs by preserving resources made available through private or public sources.

A person with a physical or cognitive disability may be eligible for taxpayer-funded public benefits or privately-funded benefits to cover living expenses, as they may be unable to work or obtain full employment. time due to a disability. These public benefits, called Supplemental Security Income (SSI), are “means tested,” meaning that to claim them (or reclaim them), a person must use or “spend” most of their savings or funds. available. without restriction.

Grandfather’s Problematic Old Estate Plan

I was recently introduced to a widower who has five grandchildren. Her grandson suffered a serious head injury and broken legs in a car crash when he was 16. He will have fine motor difficulties for the rest of his life and will not be able to stand for long periods of time. He is now 22 and eligible for SSI to supplement his income. His grandparents had a typical estate plan created before the accident. It provided that on the death of the first spouse, the balance of that person’s estate would be passed on to the surviving spouse. Upon the death of the surviving spouse, the balance of the remaining joint estate would be divided, leaving shares directly to their surviving children and grandchildren.

This plan would have caused an unintended consequence for this grandfather’s disabled grandson. Since her grandson would directly receive this inheritance, her state’s Department of Human Services would have considered her inheritance an available resource, barring her from continuing to receive full government benefits, including Medicaid health insurance. , until these funds are fully utilized. His problems would have been compounded if his father had not lived when his grandfather died, as he would also have been entitled to his father’s share.

Fortunately, the grandfather has updated his estate plan (described in detail below). If he hadn’t, it would still have been possible for his grandson to continue to receive public benefits, but it would have required the state to recover the benefits paid during his lifetime before the remaining funds can be distributed to other family members. The grandfather was resolute in his decision to change his estate plan when he realized the likelihood that the state would receive some, if not all, of his inheritance.

How Additional Need Trusts Work

After working with an estate planning lawyer experienced in the complicated area of ​​public benefit planning, we explained to the grandfather that the funds can be held in a trust that will not reduce his grandson’s current benefits or will not disqualify him or other heirs from future benefits. These trusts are called additional needs trusts or special needs trusts (SNT).

An SNT can either be a first-party trust created by a parent, grandparent, guardian, or court using the beneficiary’s own funds, or a third-party trust funded by assets owned by the creator of the trust. Because the beneficiary’s assets are used, a first-party SNT requires the state benefit provider to be reimbursed for lifetime retirement benefits paid by it on behalf of the beneficiary. A first-party SNT could have been created by the court if the grandfather had not changed his original plan, but a refund from the state would have been necessary.

Grandfather’s new plan has created a third-party SNT for the primary benefit of his grandson that will supplement, but not supplant, his public benefits. Upon the death of his grandson, the remaining balance of the trust will be distributed to his grandson’s descendants or to his other grandchildren.

Since the trust is funded with the grandfather’s money and not his grandson’s, there is no need to reimburse the state for the public benefits received. The grandfather has also made similar arrangements for one of his other children or grandchildren who are not currently receiving public benefits but may be entitled to them in the future.

Alternatives to Special Needs Trusts

Special needs trusts are one of many solutions that can be used to plan for descendants who are currently receiving disability benefits or who may be in the future. Choosing an experienced trustee to oversee a special needs trust for the benefit of his grandson was a good fit for this client, given the overall size of his estate and the nature of his assets. Under different circumstances, he may have considered other alternatives, such as an ABLE account, joint trust, or purchasing exempt resources (like a car or house) for his grandson.

ABLE Accounts

ABLE accounts were created with the passage of the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014. An ABLE account is a savings account for people with disabilities. It’s like 529 college savings accounts with similar tax benefits. There is a limited amount that can be held in an ABLE account, but the balance will not be considered an available resource. The maximum amount that can be contributed annually to an ABLE account is set by the federal government and is adjusted for inflation each year. In 2022, this amount was increased to $16,000. The balance held in ABLE accounts may increase from year to year as long as it does not exceed the maximum amount allowed in the state where the disabled person resides. This limit currently ranges from $235,000 to $550,000, with many states allowing more than $500,000 to be held in an ABLE account.

Pooled trusts

A pooled trust can be a first party trust or a third party with special needs. This type of trust is managed by a non-profit organization and is often a cost-effective solution, as the funds of many beneficiaries are pooled into a single master trust for administrative and investment purposes. Sub-accounts are then created for each beneficiary, with the disabled person’s account receiving a proportionate share of all fund income.

Distributions may be made by the non-profit trustee from the beneficiary’s share and used for its purposes. One important thing to note: pooled trust providers generally cannot hold a home for a disabled beneficiary, unlike a trust created for a single beneficiary.

Purchase of exempt resources

When determining the resources of a disabled person in the calculation of his benefits, the value of personal and movable property, a car and a dwelling occupied by the person will not be taken into account. Purchasing exempt resources, such as an automobile or residence, can be an effective strategy for some people, especially when combined with a joint trust or ABLE account.

It’s a good idea for everyone to review their estate plan from time to time, especially because the personal circumstances of beneficiaries may change or changes in state laws could benefit them or their beneficiaries. The time you take to plan carefully with a qualified estate and benefits planning attorney can improve the quality of life for your beneficiaries and provide additional public resources for a disabled child, grandchild or other family member. .

Vice President/Counsel, Argent Trust Company

Jim Ferraro is vice president and trustee in the office of Argent Trust Company in Shreveport, Louisiana. Ferraro is a 2003 graduate of the University of Missouri at the Kansas City School of Law, past chairman of the family and law section of the Kansas City Metropolitan Bar Association, and is a member of the Shreveport Tax and Estate Planning Council.

Comments are closed.