By Raley L. Wiggins
Attorney at Law | Red Oak Legal, PC
Since the 1960’s, the federal government has implemented a number of programs that help provide basic assistance to people in need. Programs like SSI, SSDI and Medicaid provide a safety net for many in our society.
For example, Medicaid pays for a great deal of the nursing home care in this country. SSI provides a minimum level of income for many people with special needs, or who are suffering from some condition which makes it difficult or impossible to support themselves financially.
But, these programs by design are intended to provide minimal, last-resort benefits for basic necessities like food, shelter, and medical care.
These benefits can be very valuable. Without Medicaid, nursing home residents would have to come up with about $6,000 per month to pay for their care—most people cannot afford this. Likewise, for someone with a physical or mental disability, SSI provides some minimal financial support, which over a lifetime really adds up.
What should you do if a Medicaid or SSI beneficiary is set to receive a financial windfall, such as an inheritance, or damages awarded in a lawsuit? Because many of these programs are “means tested” (meaning eligibility is based upon your income and assets), such a windfall may actually cause the recipient serious problems.
Should you even leave an inheritance to a special needs person, or to a Medicaid or SSI beneficiary? The answer is yes—but only if you do it right.
For example, Mr. Smith is in a nursing home, while Mrs. Smith is living at home. After spending down his half of their money, Mr. Smith is nearly broke and qualifies for Medicaid, which covers the monthly cost of his nursing home care. So long as she is living at home, Mrs. Smith can shield about half of their assets and some of their income to support herself.
After Mrs. Smith dies, however, her half of their assets are now available for the cost of Mr. Smith’s care. The result, without getting too technical, is that Mr. Smith is disqualified from receiving Medicaid benefits, and must now spend down Mrs. Smith’s half of their money on his healthcare before re-applying for Medicaid.
This result could have been prevented with proper planning.
When Mr. Smith went into the nursing home, Mrs. Smith should have updated her estate plan to leave Mr. Smith the minimum spousal share required by law, and left the remainder to their children. In addition, the share that Mr. Smith received should have been left in what is called a “Special Needs Trust” or “Supplemental Needs Trust” (or “SNT” for short).
This would set aside Mr. Smith’s inheritance in a special fund, the SNT. Placing his inheritance in the SNT means that it is protected from being spent on his medical care, but does not disqualify him from receiving Medicaid.
The SNT funds may be tapped to provide Mr. Smith with items or services to improve his quality of life, and to pay for things that Medicaid does not cover. For example, he could purchase a television or comfortable chair for his room, pay for new dentures or glasses, purchase clothing, pay for his telephone service, etc. These are items he has no money to pay for, and which Medicaid does not cover.
The best part, however, is that because Mrs. Smith updated her will to leave Mr. Smith’s assets in an SNT, any money left at his death can pass to their heirs. This could not have been accomplished if she had not updated her will.
Consider a younger person, someone with a condition or injury that will require lifelong care. A financial windfall will similarly cause this person to lose eligibility for means-tested government benefits like Medicaid and SSI. Over the course of a lifetime, these benefits really add up.
Rather than leaving them an inheritance outright, you should establish an SNT instead to help support your loved one, and to improve their quality of life. You do not need a large amount of money to do so, either. There are cost effective solutions, such as pooled trusts, which can be used to preserve even a small amount of money while maintaining eligibility.
Anytime you are dealing with massive bureaucracies like the Social Security Administration or Medicaid, there is a great deal of red tape to cut through. Always consult with an attorney experienced in special needs planning to ensure that your beneficiary receives the maximum benefit of their inheritance as well as protection of government benefits.