When you are engaged in estate planning you have to consider the optimization of your assets as you plan for their ultimate transfer to your loved ones. This is familiar territory for most people because this type of activity resembles the financial planning that you have engaged in all of your life. However, in addition to preparing the assets for distribution one must also consider the recipients. Exactly how you choose to provide for each family member can vary considerably depending on his or her age, station in life, occupation, marital status, and the state of his or her health.
With this in mind, providing for individuals who are challenged by physical or mental disabilities requires special attention. Many people who are in this position receive long-term care assistance through Medicaid, and this type of care is extraordinarily expensive. To qualify for long-term care through the government-funded Medicaid system an individual cannot have more than $1,600 in personal assets. So if you are were to leave an inheritance directly to a person who is receiving Medicaid benefits your attempt at generosity could wind up costing them access to these valuable benefits.
It is possible to take care of your loved ones who are receiving Medicaid benefits by creating a third-party special needs trust. To employ this strategy you fund the trust, appoint a trustee, and name your physically or mentally challenged heir as the beneficiary.
These “special needs” or “supplemental” trusts are so named because they can only provide for the needs of the beneficiary that are not being paid for by Medicaid. Is very important that the trust be worded precisely because the trustee must have sole discretion over distribution of the funds and the beneficiary must not have access to them. In addition the trustee must act very carefully to be certain that no expenditures from the trust are overreaching the “special needs” boundary and thus jeopardizing Medicaid eligibility.
The third-party grantor of the trust may also revoke it at any time and include a secondary beneficiary in the trust agreement who would receive any remainder upon the death of the primary beneficiary.