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Special Needs Planning: Beware of Medicaid Estate Recovery

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special needs planning 3You have to evaluate the implications when you are leaving inheritances to a number of different people that are in different life situations. If you have a loved one with a disability, a particular estate planning strategy is required, and we will explain the details in this blog post.

Government Benefits

Most people get health insurance through their employers, and a significant percentage of individuals with disabilities do not have the ability to work. This is a bad combination, because these people certainly need health insurance. The same thing is true of the income that we all need to survive.

Fortunately, there are government programs to fill these gaps. Medicaid is the health insurance program that is available to people with special needs and others that have very limited financial resources. Supplemental Security Income is a source of ongoing cash for qualified recipients.

Once eligibility has been granted, it is not necessarily permanent. An improvement in financial status could lead to a loss of eligibility. This would be the dynamic if you leave a direct inheritance to someone that is relying on these need-based government benefits.

Special Needs Trust

The widely embraced solution for this type of scenario is the creation of a supplemental needs trust. These legal devices are often referred to as special needs trusts.

If a benefit recipient was to receive a direct inheritance, they could convey assets into this type of trust. They could not act as the trustee, and they would not be able to control the assets that have been conveyed into the trust.

A suitable trustee would be empowered, and the person that received the inheritance would be the beneficiary. Under the rules of these programs, the trustee would be allowed to utilize the money in the trust to make the beneficiary more comfortable in many different ways.

As long as everything is done correctly, there would be no negative impact on benefit eligibility.

A trust that is created with funds that are the property of the beneficiary would be a first party or self-settled special needs trust. If you establish and fund the trust with your own money for the benefit of someone with special needs, this would be looked upon as a third-party special needs trusts.

Medicaid Estate Recovery

Medicaid is required to seek reimbursement from the estates of people that were enrolled in the program during their lives. If a first party supplemental needs trust has been established, Medicaid would be able to attach assets that remain in the trust after the death of the grantor/beneficiary.

Things are very different with a third-party special needs trust. When you establish this type of trust for the benefit of someone else, you would name a successor beneficiary. After the death of the first beneficiary, the remainder would go to the successor. Medicaid would not be able to touch these funds.

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Neil O'Reilly
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About Neil O'Reilly

Cornelius (“Neil”) J. O’Reilly is an attorney whose practice is focused in the areas of Estate Planning, Estate Administration, and Business Succession Planning. His main goal is to demystify Estate Planning for his clients so they can gain peace of mind knowing that they have provided for their families by passing along their hard-earned wealth and by minimizing the stress they will experience if the client becomes incapacitated or dies. He has created the firm with the belief that an estate plan should be driven by the unique needs and desires of each unique client. That’s why there are no “cookie cutter” plans or canned solutions offered to any client. Instead, Neil helps clients identify their goals and then builds estate plans based on those goals.