Having early conversations about estate planning values a person’s best wishes after death, while creating peace of mind for everyone around them. Part of those decisions may include designating who inherits money or valuables after someone dies or even while they’re still alive.
While an inheritance can be a welcome boost of income, it can also complicate things for people who receive income-based government benefits through programs such as Medicaid or the Supplemental Nutrition Assistance Program. Luckily, with some advance planning, you can protect an inheritance and government assistance through creating a trust.
What is a trust?
A trust is a legal agreement you work on with an estate planning professional where you, a grantor, can appoint yourself or someone you can rely on as a trustee to manage your money without going through a court.1 A trustee is in charge of distributing money, such as an inheritance, and paying any necessary taxes.1 Anyone who receives money from the trust is called a beneficiary.1
Trusts can be revocable or irrevocable. In a revocable trust, you can be your own trustee and can change its terms even after it’s signed. For an irrevocable trust, you give up the rights to manage your money to a trustee and the terms don’t change except for special circumstances.1 The type you choose will affect how much estate taxes you’ll have to pay and how much protection you’ll have from creditors, such as banks and credit card companies.1
There are many different types of trusts, but when it comes to protecting government benefits, special needs trusts are the way to go.
What is a special needs trust?
A special needs trust, also known as a supplemental needs trust, shelters extra income from being counted toward your benefits eligibility.2 You must spend the money on expenses your benefits don’t cover, so it’s important to keep records of how you spent any money when tax season rolls around.2 There are multiple types of special needs trusts to account for age, disability and preferences on money management.
What are the different types of special needs trusts?
There are three types of special needs trusts:2
First party trust: A first party trust is irrevocable and the beneficiary’s own money funds it. Either the beneficiary can set it up or appoint someone like a family member to do so. The beneficiary must also follow these requirements:
- Have a disability
- Be under age 65
- Send remaining money to Medicaid after they die
Third party trust: A third party trust is funded by someone other than yourself—the beneficiary—and can be revocable or irrevocable. If a person wants to give you an inheritance while they’re still alive, they can create a standalone trust to distribute money over time. If a person wants to give you money after they’ve died, they may create a testamentary trust (a trust that uses what is outlined in their will) instead.
Pooled trust: A pooled trust pools together money for multiple beneficiaries and is managed by a nonprofit organization. Think of the nonprofit as the trustee. Pooled trusts can be first or third party trusts.
What happens if I don’t put inheritance in a trust?
Without a trust, the inheritance you receive may count as extra income or assets that either disqualifies you from receiving government benefits, or results in you getting fewer benefits. In the case of Medicaid, you may be required to spend down the inheritance until you reach your state’s Medicaid income limit.3
Even if you think your inheritance won’t affect your eligibility or you don’t plan to accept it, it’s important to report any extra income you receive to benefits agencies as soon as possible. If you don’t report your inheritance, you could lose your benefits and possibly face financial penalties.4 For example, people receiving monthly Supplemental Security Income (SSI) who fail to report an inheritance could be locked out of benefits for up to three years.4
Where can I get help with creating a trust?
Your local Area Agency on Aging can help you find legal professionals experienced in estate planning who can answer your questions or help you set up a trust. A search of your ZIP code or city through the Eldercare Locator can pull up the agency nearest you. You can also call toll-free at 1-800-677-1116.
For questions about the cost of creating a trust and documents you’ll need, the National Council on Aging’s Adviser on living trusts and wills can guide you on what to expect.
Sources
1. National Council on Aging. Living Trust vs. Will: Key Differences. Found on the Internet at https://www.ncoa.org/adviser/estate-planning/living-trust-vs-will/
2. Nerdwallet.com. Special Needs Trust (SNT): What It Is and How to Start One. Found on the Internet at https://www.nerdwallet.com/article/investing/estate-planning/special-needs-trust
3. MedicaidLongTermCare.org. What Happens When a Medicaid Long Term Care Beneficiary Receives an Inheritance? Found on the Internet at https://www.medicaidlongtermcare.org/eligibility/inheritance-impact/
4. SmartAsset.com. Will My Inheritance Affect My SSI Benefits? November 16, 2022. Found on the Internet at https://smartasset.com/financial-advisor/ssi-and-inheritance
