Happy Holidays 2023, Now Is The Time, Wade's Words

People who provide care for a disabled loved one (spouse or child) worry about what will happen to that person if they suddenly pass away. Who will take care of them and how will it be paid for? Is it possible for the disabled loved one to inherit assets and still qualify financially for needs based government benefits like Long Term Care Medicaid?

A very common approach is to disinherit the disabled child or spouse by skipping that person in the estate plan. Usually this is accomplished by transferring that person’s share to the eldest child (the “custodial child”). The theory is that the custodial child will manage the extra assets wisely and use the money to pay for whatever the disabled person needs. The problem is that the custodial child often commingles the extra money with theirs and begins to spend it for themselves over time. Other family members resent the arrangement because they don’t necessarily trust the custodial child to do the right thing. Further, in Delaware, for a married couple, the surviving spouse has a statutory right to 1/3 of the deceased spouse’s estate, which is subject to a clawback (forced return of assets) from the custodial child. Thus, disqualifying the surviving spouse because of excess assets.

The better approach is to set up a special needs trust for the disabled person to inherit into as part of the caregiver’s estate plan (well parent or well spouse). This type of testamentary trust[1] is often referred to as a “third party trust”. The trust for a surviving spouse must be contained in the will. For a disabled child, the caregiver can set up the special needs trust in the will or revocable trust. The reason the special needs trust works to protect assets for financial qualification purposes is that assets originated from a third party to fund the trust. The disabled person is the only beneficiary of the trust and only has access to the assets indirectly based on the trustee’s exclusive decision to distribute assets. Upon the death of the beneficiary, if there are trust assets left in the account, such assets can be directed to other family members. There is no requirement to pay back Medicaid for benefits paid out.

Please note that a disabled person can use their own assets to fund a special needs trust. This type of trust is referred to as a “first party trust”. It is set up during the disabled person’s lifetime in order to protect assets for financial qualification purposes. The trust is a standalone document (not part of someone else’s will or trust). The trust is funded either with the disabled person’s savings or an award from a lawsuit. For Medicaid purposes, a first party trust protects assets as long as the disabled person is the sole beneficiary of the trust, does not have direct access to the assets, and Medicaid is the primary beneficiary at death.

In conclusion, use special needs trust planning to protect and control assets for a disabled loved one. The tactic of skipping the disabled person as part of your estate plan has many unforeseen consequences.

[1] A testamentary trust is a trust that is established in accordance with the instructions contained in a last will and testament.