January 10, 2017
If your spouse is disabled and has qualified to receive Supplemental Security Income (SSI) and/or Medicaid benefits, you will need to carefully consider how to provide your Spouse with an inheritance, or else those benefits be endangered. The resource and income limits required in order to qualify for SSI and Medicaid are very low. A poorly planned inheritance to your Spouse can result in disqualification from these vital programs.
There are a number of planning techniques that can be utilized in order to prevent this disqualification. They include converting counted resources into exempt resources, such as using the inheritance to fund the purchase of a home, car, a pre-need funeral contract, or a qualified-Medicaid annuity for the benefit of the disabled Spouse. Another technique is the establishment of a third-party Special Needs Trust.
A third-party special needs trust is a specialized trust established for the benefit of a disabled third party. In a third-party special needs trust, the trust is funded using assets belonging to somebody other than the beneficiary. A third-party special needs trust will benefit the disabled beneficiary during the beneficiary’s lifetime, and thereafter the trust assets can be distributed as instructed by the original creator of the trust. There is no requirement for a Medicaid payback provision to be included in a third-party special needs trust. The trust is used for special needs during the disabled beneficiary’s lifetime, and thereafter can be distributed to any person or persons selected by the trust creator.
The estate planner must be careful in how a third-party special needs trust is created for the benefit of a Spouse. A third-party special needs trust cannot legally be created for the benefit of a Spouse in a standalone trust document. The trust must be a testamentary trust established in a Last Will. There is a federal law requiring this, arising from what are broadly known as the Medicaid trust rules. See 42 U.S.C. Section 1382b(e)(2), which states that “[f]or purposes of this subsection, an individual shall be considered to have established a trust if any assets of the individual (or of the individual’s spouse) are transferred to the trust other than by will.” (Emphasis added.)
For example, suppose Wife sets up a non-testamentary special needs trust for the benefit of her disabled Husband, using Wife’s own assets. Under the rules, it will be considered that the disabled Husband set up the trust himself and that the trust is available to him. This can cause inadvertent benefits disqualification. In this day and age when lots of estate planners believe that the revocable trust should be the primary estate planning tool, you need to be careful if you are setting up a third party special needs trust for the benefit of a surviving spouse. Revocable trusts can still be used, but thought should be given to a possible “pour over” back to a testamentary special needs trust if Medicaid long term care benefits may be sought in the future for a surviving spouse.
Today, estate planners have to have a broad background in the law to be able to recognize the myriad number of issues that can arise. The practitioner needs to be able to recognize the complexity of elder issues, and the large array of laws that can come into play. Estate planners must be able to recognize situations that implicate these specialized areas of the law in order to provide the best advice to their clients. At Upstate Estate and Elder Law, PA, we have taken the time and put resources into making sure we understand these issues so that we can provide sound advice and representation to our clients.