If you’re planning your estate and you have a disabled child or other family member for whom you want to provide, the approach you take can require some intricate planning. If you leave her an inheritance outright, you may be doing her far more harm than good, as the gift can cost her government benefits that she desperately needs. Restrictions apply as to what you can leave her and how you can do it without affecting her benefits.
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If your loved one is disabled, she is most likely on Medicaid -- health insurance that pays for her special needs and treatment. To qualify for Medicaid, she must usually be eligible for Supplemental Security Income as well. Both these programs are need-based, meaning recipients are barred from earning too much and owning too much. Receiving even a small inheritance from you may push your loved one over the limits -- and she could lose state benefits as well if she’s receiving any. If she loses her Medicaid benefits, the costs of her treatment could far exceed anything you leave her.
The SSI limit for property is $2,000; your loved one cannot own assets exceeding this value. If you leave her even $2,100, she’s disqualified from receiving these vital benefits, and without them, the $2,100 probably won’t last her very long. Even if you leave her a home in which she can live for the rest of her life, this won’t help if she has to sell it to pay for medical care because she lost her Medicaid benefits.
Even if you set up a trust fund for your loved one so she doesn’t receive the bulk of her inheritance in a lump sum that pushes her over the property limit, she'll have a reduction in her SSI benefits if the trust pays for her necessary living expenses. Payments toward her rent, mortgage, utilities or groceries represent “in-kind” income where the government is concerned. This reduction is either dollar for dollar, equal to what the trustee pays on her behalf, or one-third of her monthly SSI benefit plus $20, whichever is less. SSI caps out at $721 a month as of 2014, so this could reduce that $721 by about $258 every month she receives this assistance. If the trust gives her cash, this is unearned income and it is also be deducted dollar for dollar from her benefit amount. She cannot receive more than the monthly benefit rate of $721, but even if the trust pays her less than this, her SSI benefits are reduced by the same amount, not counting the first $20. For example, if you were arrange for her to receive $500 a month from a trust, she would receive only $241 from SSI -- or $721 minus $480, which includes the deduction of the extra $20.
Special Needs Trusts
Not all trusts penalize your disabled loved one. A special needs trust sidesteps many inheritance restrictions, but creating one can involve expertise and care so you might need the help of a professional. The idea behind a special needs trust is that it offers your loved one niceties that she would not otherwise be able to afford or enjoy. She must pay for food and shelter with her SSI, but the trust can pay for medical needs that Medicaid doesn’t cover, as well as clothing, transportation and recreation. As long as her assets remain in trust, and if the language in the trust documents is drafted correctly, she does not technically own them, so they don’t count against the $2,000 limit. Your trustee must take care not to make cash payments directly to her, as this would count against her as income for SSI purposes. For example, he can purchase a new coat and give it to her, which is fine. However, if he gives her money so she can go buy herself a coat, the money is income.