Imagine you have a loved one – your daughter, for instance – who has special needs. And, imagine your loved one gets government benefits, like Medicaid, to help cover the cost of her care. These benefits don’t generally put money in your daughter’s pocket. Instead, in most instances, they are paid directly to the professionals who provide services to your daughter. You, as your daughter’s parent, provide all the additional support (financial and otherwise) that enhances your daughter’s quality of life and ensures that she does not live in poverty, with only her basic needs met.
Now, imagine what would happen if you passed away and left an inheritance directly to your daughter. Even a modest inheritance would disqualify her for the government benefits that pay for her basic care. She would need to exhaust her inheritance before she could once again qualify for benefits. But with you gone, there would be no inheritance left and no one to provide all the extra support that you provided during your lifetime. Your daughter could very well face a life where only her basic needs were taken care of.
This is why, instead of leaving an inheritance directly to a loved one with special needs, it’s a good idea to establish a special needs trust for that person. Once a special needs trust is set up, you put your loved one’s inheritance in the trust, which is irrevocable. Instead of being paid directly to your loved one, the inheritance is managed by a trustee, who follows strict rules in using trust funds to supplement your loved one’s income and lifestyle. This way, your loved one continues to have access to government benefits, but can enjoy the same quality of life after your death as he or she did during your lifetime.
In order to be effective, a special needs trust has to be established and managed in compliance with some very stringent rules. If you’re considering a special needs trust, you’ll want to enlist the help of an experienced estate planning attorney to make sure that you don’t run afoul of these rules.