As a California estate lawyer, when I meet with parents to start the process of creating a special needs plan for their child with disabilities, I almost always advise against leaving any type of inheritance outright to the child when mom or dad passes away.
This can come as a shock to parents, who may strongly believe that leaving their child a large life insurance policy or cash benefit, for example, would be more helpful in the long run than having the ability to receive any modest benefit amount offered by the state or federal government.
However, it’s important for parents of children and adults with special needs to remember that government benefit eligibility and health insurance often go hand-in-hand. Individuals with disabilities often depend on their Medicaid benefits to pay for continued therapies, medications, doctors’ appointments, and even long-term care costs. Benefits like Medicaid are need-based, meaning that having “too many assets” will result in an immediate termination of coverage. And, it’s often losing access to such benefits that is devastating for an individual with disabilities over the long term.
Let’s say, for example, a parent wants to leave a $500,000 life insurance policy outright to their adult child with special needs. Doing so would cause the child to lose his or her health care eligibility when mom or dad dies, and the likelihood of securing any other kind of affordable health care plan in the current market today is low. It wouldn’t be hard to imagine just how quickly a $500,000 inheritance would get eaten up in medical and long-term care costs once the child is forced to pay out of pocket for such expenses.
Fortunately, there is a solution that provides the best of both worlds for parents who want to leave their child an inheritance to ensure long-term financial stability without jeopardizing access to benefits like Medicaid. That solution is most often the creation of a Third-Party Special Needs Trust, which will “hold” the assets for the child and be managed by a trustee of the parents’ choosing, without actually going into the child’s name.
The funds set aside in the trust can then be used to pay for expenses for the child’s future, but the child will still be able to stay on Medicaid and collect benefits because technically his or her financial situation remains unchanged. In the majority of cases, this is the safest and best tool that will ensure the individual can access as many financial and medical resources that he or she may need.
However, Special Needs Trusts are complex legal tools that should be created by an attorney who focuses on this area of the law. If you live in the Sacramento area, I would be happy to meet with your family to answer questions and explore how a Special Needs Trust can help your child when you are gone someday. If you’d like to schedule a consultation, simply call my law firm at 916.247.6868.