There are various different ways to arrange for asset transfers to your loved ones when you are planning your estate. Some people automatically reduce estate planning to the execution of a last will. In fact, this is just one of many possible vehicles of asset transfer, and it may not always be the best choice.
As a case in point, consider the situation that would exist if you wanted to leave an inheritance to someone with a disability who is relying on Medicaid coverage.
Need-Based Benefits
Medicaid is a government health insurance program for people with significant financial need. Many individuals with disabilities are going to be unable to work to earn income, they do not have health insurance, and they do not have a lot of assets. Someone in this situation would be able to qualify for Medicaid to pay for his or her care and treatment.
People with disabilities sometimes incur enormous health care expenses. Medicaid is absolutely essential for these individuals.
If you were to leave a direct inheritance to someone who was receiving government benefits via the terms of your last will, this individual would suddenly be catapulted into a different financial situation. As a result, government benefit eligibility could be forfeited.
You would actually be doing more harm than good by leaving this person an inheritance if you go about it the wrong way.
Special Needs Trust
Now that we have provided the necessary background information we can get into the topic of this post. A supplemental needs trust is a trust that is used to provide for someone with a disability who is receiving government benefits without jeopardizing this person’s benefit eligibility. It should be noted that these trusts are sometimes referred to as special needs trusts.
Medicaid and other government benefit programs (such as SSI) will pay for health care expenses and some additional needs, but they won’t pay for everything.
When you create a supplemental needs trust you name a trustee. The heir with special needs would be the beneficiary. The trustee can use assets that have been conveyed into the trust to make purchases that improve the quality of life of the beneficiary. We should emphasize the fact that the beneficiary does not handle the resources. The trustee must use the funds to pay for things that government benefits will not cover, including education, dental expenses, recreation, vacations, computer equipment and other electronics, and many other life enhancing goods and services. These expenditures are allowable under benefit program rules.
If you establish and fund a special needs trust for the benefit of a loved one with a disability, the trust would be a third-party supplemental needs trust, because the funding would be coming from a third-party. Under these circumstances, the Medicaid program would not seek reimbursement from assets that remain in the trust after the death of the beneficiary.
However, it is also possible for a legal guardian, a court, a parent, or a grandparent to establish a special needs trust with financial resources that are the property of the beneficiary. This would be called a first party or self settled special needs trust. When this type of trust has been established, Medicaid would seek to recover monies spent during the life of the beneficiary from his or her estate, so anything that may be left in the first party trust would be in play.
No One Size Fits All Estate Plan
As you can see, there are advanced estate planning techniques that can be utilized to address complicated circumstances. Each family is different, and each person on your inheritance list is in a different life situation. You should take this into consideration when you are engaged in your estate planning efforts. If you don’t understand all the facts, and you take action on your own, mistakes can be made, and negative consequences could come about later on.
A well constructed estate plan will provide for each individual in the optimal fashion. There is no particular reason why the typical layperson would be aware of all the options that are out there, and why you may want to use one solution instead of another.
This is why it is important to develop a relationship with a local Indianapolis, IN estate planning attorney. We would be glad to discuss your unique family situation with you in person and help you develop an estate plan that is right for you and the people that you love. If you’re ready to get started, send us a quick message through our contact page or give us a call at (317) 684-1100.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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