If you want to leave a gift or an inheritance to a child or grandchild with special needs, it’s important to consider that it may do more harm than good. This is because, to continue being eligible for Supplemental Security Income (SSI), a beneficiary generally must not have assets above $2,000. While Illinois allows higher assets for Medicaid ($17,500), exceeding the federal limit will disqualify the beneficiary from monthly SSI income.
Receiving an inheritance can unintentionally disqualify your loved one from these vital programs. To prevent this, many parents and grandparents include a special needs trust (SNT) in their estate plan. However, not all SNTs are the same.
First-party special needs trusts
This type of trust does exactly what you create an SNT for: hold a beneficiary’s assets so that they can maintain eligibility for government benefits. However, you can only fund this trust with assets that belong to the beneficiary, such as a direct inheritance or lawsuit settlement.
There are two downsides to a first-party SNT. First, regulations generally restrict these trusts to beneficiaries under age 65. Second, they must contain a “Medicaid payback” provision. Upon the beneficiary’s death, the trust must reimburse the state for medical expenses before the money goes to the rest of the family.
Third-party special needs trusts
As implied by the name, the main difference between this type of SNT and the first-party SNT is that it holds assets that never belonged to the beneficiary. Instead, these assets come directly from parents or grandparents.
Because these funds are not the beneficiary’s property, the state has no right to claim reimbursement for medical care. Upon the beneficiary’s death, remaining assets can pass to other family members or a charity, without having to go through the state.
Ensuring the right fit for your family
Essentially, the SNT’s source of funding determines whether an inheritance remains with your family or must eventually reimburse the state. Of course, every family and situation is different. If you are planning to set up an SNT for a loved one, it’s advisable to consult with an experienced estate planning attorney. They can explain how these laws may apply to you.