Government disability benefits are wonderful, but they have some significant drawbacks. One of the big ones is that they are needs-based, i.e., the recipient needs to be just shy of broke to qualify for them. A sudden influx of cash, such as from an inheritance, will cause them to be disqualified, and getting re-qualified is a long and arduous process.
So, how can this be prevented?
One option is to give that child’s share to a sibling, with instructions to use it to help the disabled child. But this method is far from foolproof. First, you must trust that the child will use the money to help their disabled sibling and not keep it for themselves. Second, the child has to be savvy enough to keep the funds separate so they’re not tempted to use them on themselves. And third, gift tax laws can make helping the disabled sibling rather complicated.
The better answer is to use a Special Needs Trust (SNT). An SNT is a special kind of trust that holds money on behalf of a beneficiary, but the money is never in the beneficiary’s possession or under their control. Because the beneficiary has no direct access to the money, the government doesn’t consider it theirs or count it when deciding if the person qualifies for the benefit. Additionally, there is no limit on how much money the SNT trustee can use for the beneficiary’s benefit, since that money would not be considered a taxable gift.
But what if you die without setting up the SNT? Can your child set up an SNT for themselves?
Technically, yes, but since the trust will be set up by the child, the inheritance will be considered the child’s money, and that changes the terms of the SNT. When the SNT is set up by a third party, and all the money comes from a third party, any money left on the death of the disabled child can be passed on to that child’s children, or any other person the child wants to leave it to. When the SNT is set up by the disabled child themselves, the government requires that they get repaid first, and only after that can the money be passed on to the disabled person’s beneficiaries (assuming there’s anything left after that). So it’s much better to set up an SNT for a disabled person, and not have the disabled person set it up for themselves.
If you would like to learn more about SNTs or would like to include one as part of your estate plan to help ensure your child receives their disability benefits even if they receive an inheritance, you are welcome to email me at kaway@kawaylaw.com.
