If your spouse is disabled and has qualified to receive, or may in the future qualify to receive, Supplemental Security Income (SSI) and/or Medicaid benefits, you and your lawyer will need to carefully consider how to provide your spouse with an inheritance, or else his or her qualification for those benefits will be at risk. The program resource and income limits to qualify for SSI and Medicaid are very low. A poorly-planned devise will likely disqualify your spouse from these vital programs.
You can prevent this disqualification prior to the death of the non-disabled spouse by using special estate planning techniques. For example, you can convert Medicaid-counted resources into exempt resources, such as using the inheritance to fund the purchase of a home, car, a pre-paid funeral contract, or a qualified-Medicaid annuity for the benefit of the disabled spouse. Also, consider setting up 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, such as a husband, wife, or child. This 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 (meaning the benefits paid to the disabled beneficiary do not need to be repaid to the state after his or her death). The trust is used for special needs such as health, education, and special support beyond what benefits can provide, during the disabled beneficiary’s lifetime. After the beneficiary’s death, trust funds can be distributed to any person or persons selected by the trust creator.
A third-party special needs trust cannot legally be created for the benefit of a spouse in a stand-alone trust document; the third-party special needs trust must be written carefully into the Will as a testamentary trust. Federal law governs these trusts, 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 Husband sets up a non-testamentary (stand-alone) special needs trust for the benefit of his disabled Wife, using Husband’s own assets. Under the rules, the trust will be treated as if the disabled Wife set up the trust herself and that the trust funds are available to her to use as she wants to. This scenario can cause inadvertent benefits disqualification. In this day and age when many people believe that the revocable trust should be the primary estate planning tool, you need to carefully consider whether a will is actually the better option if you need to establish a third party special needs for your spouse. Make sure you talk to your lawyer to discuss your own personal situation and see whether a special needs trust makes sense for you, and to make sure your estate plan comports with the rules for such a trust.
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