Estate Planning for People with Disabilities


The wealthy in America have learned how to transfer wealth to family members with very few estate or gift tax problems with estate planning. A very common method is making annual gifts of up to $13,000 per year to selected beneficiaries without tax consequences of any kind. For veterans and others with disabilities, transfers to family members are not as simple. For individuals with disabilities who inherit money outright or receive a personal injury settlement and need to qualify for or keep government benefits like SSI, SSDI, veterans disability benefits or even Medicaid should consult with an attorney.

Ironically, for someone with a disability, a large amount of money can pose real problems. Eligibility for many means tested programs with countable assets greater than $2,000 is denied. Someone receiving federal benefits cannot give away money in excess of $2000 without losing most means tested benefits for varying periods of time. For example, a large personal injury settlement or inheritance can soon be gone without Medicaid assistance because of the high medical or assisted living expenses.

Establishing and funding a special needs trust (supplemental needs trust or disability trust) with substantial personal injury proceeds or inheritances is only a partial solution to this problem. A disabled person under 65 can fund (“self-settle”) a special needs trust for their own benefit with personal injury or inherited funds without transfer penalties. The funds in a well drafted special needs trust will not count as an asset, this will preserve most means tested benefits and provide for the beneficiary’s special needs during his or her lifetime.

Establishing benefits for surviving family members upon the beneficiary’s death is not as easy. Any trust funds left at the beneficiary’s death in one of these self-settled special needs trusts must first be used to pay back Medicaid for benefits paid. Only if the funds remaining are more than sufficient to cover Medicaid’s claims will there be money available for the family beneficiaries.

Rules regarding transfer penalties and estate recovery vary from program to program and state to state. SSI has transfer penalties: some Medicaid programs have transfer penalties. Various kinds of self-settled special needs trusts have specific establishment requirements and strict payback provisions. A pooled trust established with a beneficiary’s own funds, for example, will include payback provisions for Medicaid plus retention provisions for the benefit of the not-for-profit Trustee that may completely preclude any possibility of family beneficiaries receiving funds at the disabled person’s death.

Preserving any means tested benefits is usually the first priority for the disabled person about to receive a personal injury settlement or inheritance. Good advice and fast action are needed to preserve those benefits. Beneficiaries of means-tested programs have an obligation to inform the government promptly about any changes in circumstances; money sitting in a bank account in excess of $2000 at the end of the month may turn into a disqualifying asset.

When benefitting other family members is also a high priority, estate planning to make transfers that produce penalties and to use the inherited or personal injury funds to pay privately for needed care during the penalty period may be also feasible. With the help of a qualified attorney, it may be feasible to create an even more complex design for asset use that combines a lifetime giving plan producing limited initial eligibility penalties while funding a self-settled special needs trust that may provide benefits later for family members.


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