How to Fix a Broken Plan:
Salvaging the Inheritance of
an Individual with Special Needs
A slightly revised version of
this article was published in
The Voice, the newsletter of
The Special Needs
To subscribe to The Voice,
please visit http://www.specialneedsalliance.com/subscribe.aspx
Lisa Nachmias Davis
Attorney at Law
203-776-4400
Fax
davis@sharinglaw.net
Many families have learned
to include an individual with special needs in the estate plan by leaving a
bequest to a "supplemental needs trust" that will supplement, but not
replace, the beneficiary's government benefits.
But what if planning has not been done, and funds pass to the disabled
individual outright? Or what if Great-Grandma left a trust years ago, long
before anybody knew that one of her descendants might need government benefits,
and the trust is about to terminate? Will the state take everything? Will the disabled individual lose
benefits? All is not lost -- with
careful planning, the special needs attorney can "save the day" by
fixing up this estate plan gone wrong.
That's the good news. There is some bad news, too. Although federal law
prohibits states from making a living beneficiary repay Medicaid received
during the individual's lifetime (except where the individual is receiving proceeds
of litigation over medical injuries that gave rise to the Medicaid benefits),
and there is no repayment requirement for SSI, Social Security Disability, or
Medicare, many states do require the recipient of an inheritance to repay the state
for state-funded benefits received in the past.
Often, the state will have "kept tabs" on benefits received
long ago, and when it learns of the inheritance, will present a claim to the
Personal Representative or Executor.
It's important to seek legal advice before agreeing to these claims. Poor record-keeping by the state, late filing
of the claim, changes in the laws under which benefits were awarded, or loose
wording in the recovery laws, may all permit defenses to the state's claims.
The
state's claims for reimbursement aside, whether or when the inheritance will
affect the individual's government benefits will depend on the type of benefits
and the state's laws. Social Security
Disability and Medicare are not "needs based"; the individual will
not lose these benefits upon receipt of an inheritance. With respect to "needs-based"
benefits like Medicaid, most states allow benefits to continue uninterrupted
until the estate has settled and the beneficiary has a legal right to receive
the inheritance. This provides some time
to plan and make alternative arrangements.
Once the inheritance has been received, however, the law will usually
require the beneficiary to notify the State within a few days or months. The beneficiary's assets may then exceed
required limits, resulting in a termination of benefits. Sometimes, the receipt of an inheritance may
be considered "income" and affect benefits for a period of time. In other words -- no need to panic, but act
quickly!
What
are the options? (1) Keep the
inheritance; (2) Spend the inheritance; (3) Disclaim; or (4) Self-Settled
Trust. In most cases, the last option,
establishing a self-settled "D4A" trust (also known as an "OBRA
'93" Trust or "Payback" Trust) will be the best option.
First,
some inheritances may be so large, and some government benefits so modest, that
it will be acceptable to risk loss of benefits.
As noted above, an individual receiving Social Security Disability and
Medicare will not lose these benefits upon receipt of an inheritance. If the inheritance permits the individual to
purchase supplemental insurance and pay for Medicare Part D drug coverage, it
may not matter that Medicaid is lost -- at least for the time being. Some services may be provided free of charge
to all, or with only modest charge. Suppose the individual has few additional
needs and is living in the community. He or she may prefer the money to the
state interference and legal fees that may come with a self-settled trust. Planning is still necessary to prevent a gap
in coverage and to monitor whether later changes in circumstances will require
a change in plans and a second look at a D4A trust.
Second,
it's important to keep a sense of proportion.
If the inheritance is $5,000, it may be possible to spend it quickly on
goods and services. Even a larger
inheritance may be used to purchase a home, such as a condominium, which is
exempt under benefit laws. The
individual's case worker may be able to advise whether this approach will work,
or whether even a spent-down inheritance will cause a temporary loss of
benefits.
If
government benefits are indispensable and "spending down" is not the
answer, the family's immediate thought may be to suggest that the individual
"disclaim" or renounce the inheritance, so that it passes instead to
other family members. This approach is
dangerous. State law may prohibit such a
renunciation. Where it is even legally
possible, doing so is often considered a "transfer of assets" that
can result in loss of SSI or Medicaid coverage for long-term care needs. It is
essential to consult first with an attorney knowledgeable about the laws of the
beneficiary's home state regarding the legal consequences of such an
action. Perhaps more importantly, renunciation
may not be the best option even if it is possible. Most recipients of government benefits could
improve their quality of life with additional funds.
The
last, and often the best option is the self-settled "D4A" trust (also
known as an "OBRA '93" Trust or "Payback" Trust) or the
"D4C" pooled trust account. These
trusts can preserve the remaining inheritance in a trust for the individual's
supplemental needs during lifetime without further affecting Medicaid benefits
or SSI.
What is a D4A trust? It is a trust described in federal law, at
section 1396p(d)(4)(A) of Title 42 of the U.S. Code -- hence the name
"D4A." This law describes a
trust that is established for the lifetime benefit of one
individual under age 65 who is either blind, or disabled as defined by the
Social Security laws, and which requires that upon the beneficiary's death, the
state will be repaid for all Medicaid the beneficiary received during his or
her lifetime. The trust may only be
established by parents, grandparents, courts, or "guardians"
(construed to include conservators), not by the disabled individual directly. The
"D4C" pooled trust is very similar, but may be established directly
by the individual, and in many states is available to individuals of any age,
even over 65. The D4C pooled trust account may pay any remaining
funds to the nonprofit organization that holds the trust, rather than (or as
well as) to the State, but no funds may pass to other beneficiaries. Typically, the D4C will be a better choice
for a modest inheritance when a D4A trust would be uneconomical, and it is the
only choice for an individual 65 or over without a living parent.
In some states, a disabled individual
under 65 with a living parent may be able to arrange for a D4A trust with
little legal fanfare. If there is no
living parent or grandparent, or (in some states) if the individual receives
SSI, it may be necessary to have a guardian or conservator establish the trust. If no guardian or conservator has already
been appointed, this process should begin immediately. In most states, the guardian or conservator
must then petition the court for authority to establish the trust, which will
be subject to review by the court and quite often, input from the state
Medicaid agency or attorney general's office.
States laws vary widely when it comes
to the requirements of D4A trust. Some
require the Trustee to obtain approval for each distribution made on behalf of
the beneficiary. Others permit the State
to question the distributions at the time the trust files an accounting with
the court. It is important that all
parties know what they are "getting into" when establishing the D4A
trust. When it comes to an account in a
D4C pooled trust, the beneficiary will want to know how accessible the nonprofit
trustee will be when expenditures are requested, how well-managed the trust will
be, and what fees will be required. It
is also important to know whether the state permits an individual over 65 to
fund a D4C without a "transfer of assets" penalty.
Before establishing the trust, it is also
important to verify whether any state-funded benefits will be affected. The D4A trust (or D4C pooled trust account)
is only guaranteed to preserve eligibility for Medicaid and for SSI. Many states are free to craft programs that
will "count" assets in such trusts as available, or to
"punish" those who establish D4A or D4C trusts as if the assets had
been given away.
The rules affecting
entitlement benefits for disabled individuals are complex. Attorneys who handle
estate planning or probate are not always familiar with these rules. While the D4A
trust or D4C pooled account can provide a significant benefit when appropriate
planning was not done, it is essential to obtain both good estate and tax
planning and good entitlement planning when trying to salvage the inheritance
of an individual receiving government benefits.