How an Inheritance Can Affect Public Benefits in Florida

Family members and loved ones often recognize the importance of setting aside funds for a beneficiary with a disability and want to ensure those funds remain available long after they pass away. However, how those funds are left to the beneficiary is extremely important.

Without proper planning, a generous and well-intentioned inheritance can cause a beneficiary with a disability to lose the means-tested public benefits they rely upon. Fortunately, there are several ways to provide an inheritance for a loved one with a disability without jeopardizing their public benefits.

How Can an Inheritance Affect Public Benefits?

In Florida, an individual receiving certain means-tested benefits, including Supplemental Security Income (SSI) or Medicaid, generally cannot hold more than $2,000 in countable assets. When an inheritance is left directly to a person with a disability, that inheritance may be considered an asset and could cause the beneficiary to exceed the applicable asset limit and lose eligibility for benefits.

Depending on the amount of the inheritance, the beneficiary may be able to “spend down” the funds by using them to pay for expenses and services. However, to avoid affecting their means-tested benefits, the funds generally must be spent during the same calendar month they are received so that the beneficiary is below the applicable asset limit by the last day of that month.

Additionally:

• The funds must be spent solely for the beneficiary’s benefit.
• Funds cannot be given away or spent on another person.
• A spend down may not be practical for a significant inheritance.

For these reasons, spending down an inheritance is often not a practical solution unless the amount received is relatively small or the beneficiary has significant expenses or debt.

Using a Special Needs Trust to Protect an Inheritance

A Special Needs Trust (SNT) can allow an inheritance to be preserved for a beneficiary’s future needs while helping protect their eligibility for means-tested public benefits.

Funds in a Special Needs Trust are managed by a Trustee on behalf of the beneficiary. The Trustee can generally be an individual or entity other than the beneficiary, such as a trusted family member, professional trust company, or financial institution.

Trust funds may be used for expenses and other items that supplement the beneficiary’s government benefits and enhance their quality of life. Because the assets are held by the trust rather than directly by the beneficiary, they generally are not considered the beneficiary’s personal assets for purposes of means-tested public benefits.

There are several types of Special Needs Trusts, and determining which type is appropriate depends largely on one important question: Whose money is being placed into the trust?

First Party Special Needs Trusts

A First Party Special Needs Trust, also called a Self-Settled Special Needs Trust or a d4A trust under 42 U.S.C. Section 1396p(d)(4)(A), is funded with assets belonging to the person with a disability.

Common funding sources include:

• Personal injury settlements
• Medical malpractice settlements
• An inheritance received directly by the beneficiary

Because a First Party SNT is funded with the beneficiary’s own assets, it is subject to strict requirements. Among those requirements, the beneficiary must be under age 65 when the First Party SNT is established.

First Party SNTs must also include a Medicaid payback provision. When the beneficiary dies, remaining trust funds must first be used to reimburse Medicaid for benefits provided during the beneficiary’s lifetime. Only after the required Medicaid reimbursement can any remaining funds pass to other named beneficiaries.

Because of this Medicaid payback requirement, when an inheritance is being planned in advance, using a Third Party Special Needs Trust is generally preferable to leaving the inheritance directly to the beneficiary.

Third Party Special Needs Trusts

A Third Party Special Needs Trust is established and funded by someone other than the beneficiary or their spouse. The person establishing the trust, often called the Settlor or Grantor, contributes their own assets for the benefit of the person with a disability.

Third Party SNTs are commonly incorporated into an estate plan to:

• Provide gifts for a loved one with a disability during the donor’s lifetime.
• Receive and manage an inheritance after the donor dies.
• Receive proceeds from life insurance policies.
• Hold real estate or investments.
• Receive certain retirement account assets, including assets from an IRA or 401(k).

One of the most important differences between a First Party and Third Party SNT is that a properly structured Third Party SNT is not subject to the same Medicaid payback requirement.

Because the assets placed into the trust never belonged to the beneficiary, the Grantor can specify how remaining trust assets should be distributed after the beneficiary’s death. This can allow the Grantor to provide for a loved one with a disability while preserving remaining assets for other beneficiaries.

One Trust Can Help the Entire Family Plan

Another advantage of a Third Party SNT is that other individuals can contribute to an existing trust.

For example, suppose Alan and Betty establish a Third Party SNT for their son, Christopher. Other family members or friends who want to leave Christopher an inheritance can reference the existing SNT in their own estate planning documents rather than leaving assets directly to Christopher.

Likewise, family members who want to make gifts during Christopher’s lifetime may be able to contribute those gifts to the trust.

This approach can:

• Help prevent well-intentioned gifts or inheritances from affecting Christopher’s benefits.
• Allow multiple family members to coordinate their planning.
• Consolidate funds intended for Christopher into one planning vehicle.
• Reduce the need for individual family members to establish separate trusts.

Pooled Special Needs Trusts

A Pooled Special Needs Trust, authorized under 42 U.S.C. Section 1396p(d)(4)(C), is another type of trust funded with assets belonging to the person with a disability.

A Pooled Trust is established and managed by a nonprofit organization. Each beneficiary has an individual sub-account that is maintained within a larger master trust managed by the organization.

Unlike a First Party SNT, which can only be established for a beneficiary under age 65, a Pooled Trust may be an option for a beneficiary who is 65 or older.

This can make a Pooled Special Needs Trust particularly useful when an individual over age 65 receives an inheritance and needs to preserve eligibility for means-tested public benefits. Pooled Trusts may also help minimize administrative expenses, making them an option for smaller amounts that may not justify establishing a standalone trust.

However, because a Pooled Trust is funded with the beneficiary’s own assets, Medicaid payback requirements may apply. As a result, when an inheritance is being planned before it is received, a Third Party SNT may be a more attractive option.

Can an ABLE Account Be Used for an Inheritance?

An ABLE account may provide another alternative in certain circumstances.

Unlike Special Needs Trusts, ABLE accounts have restrictions on contributions, account values, and eligibility. Eligibility also depends upon the age at which the beneficiary’s disability began.

Because of these limitations, an ABLE account may be most appropriate for relatively small lump-sum inheritances rather than larger inheritances requiring long-term management.

Planning Ahead Can Help Protect a Beneficiary’s Public Benefits

When someone plans to leave an inheritance to a beneficiary with a disability, a properly drafted Third Party Special Needs Trust is often preferable to leaving assets directly to the beneficiary.

Unlike First Party SNTs and Pooled Trusts funded with the beneficiary’s own money, a Third Party SNT is not subject to the same Medicaid payback requirements. This can allow remaining trust assets to pass to other beneficiaries after the beneficiary with a disability dies.

A Third Party SNT can also provide a single planning vehicle that other family members and loved ones can use when making gifts or leaving an inheritance for the beneficiary.

Planning before an inheritance is received can help avoid costly mistakes and reduce the likelihood that a beneficiary will need to establish a First Party SNT or Pooled Trust after receiving assets directly. Individuals considering leaving an inheritance to a loved one with a disability should work with an attorney experienced in special needs and public benefits planning to determine the appropriate strategy for their circumstances.

Get Guidance Before Leaving an Inheritance

Leaving an inheritance to a loved one with a disability requires careful planning. The attorneys at Shalloway & Shalloway can help you structure your estate plan to provide for your loved one while protecting their eligibility for important public benefits.

**Contact Shalloway & Shalloway today to discuss your special needs and estate planning options.**