Blogs from February, 2023

An old fashion approach to estate planning with a disabled child was to disinherit the child and leave the estate to the other child(ren) who would then “take care of” their sibling.

Time and experiences have exposed the pitfalls and dangers of such planning.  Even with the most trustworthy siblings and the best of intentions, the siblings cannot have full control over what the future brings.

Here’s a demonstration of how things can turn out very differently than intended:

Bernard has four children: Borris, Barry, Bob, and Barbara. Barbara has developmental disabilities and receives public benefits. Bernard recognizes that Barbara wouldn’t be able to manage her own inheritance so he prepares a will disinheriting Barbara, leaving everything to Borris, Barry, and Bob with informal instructions to his sons to take care of their sister Barbara for the rest of their lives. The boys love Barbara and have every intention of following their father’s instructions.

After Bernard’s death, his estate is distributed to Borris, Barry, and Bob in accordance with the will, who each put their inheritance funds in their personal bank accounts. The brothers take excellent care of their sister Barbara, paying for all her needs and even more. Everything is going well.

A few years later, Borris dies suddenly, and his estate is left to his wife. Borris’s wife does not feel the same obligation to use her money to care for her sister-in-law. Barry unfortunately gets divorced, and as he deposited the inherited money in a joint account, his ex-wife receives half of the inheritance, even though a substantial amount was informally earmarked for Barbara’s care. Due to the divorce, and unemployment, Barry has trouble paying his own bills and certainly can no longer provide for Barbara financially. Bob is the defendant in a major lawsuit and now has a judgment against him jeopardizing the money earmarked for Barbara.

Bernard and his sons all meant well, but circumstances beyond their control put Barbara’s continued financial security in jeopardy.

The safer and smarter alternative would have been to specifically provide for Barbara in a manner that the inheritance would be managed properly and available to her, regardless of what could happen to her brothers.

Questions about special needs planning? Read our FAQs.

The most straightforward and practical way for a parent to provide for a child with special needs would be the use of a supplemental needs trust in their planning. The child that has special needs would not receive an outright inheritance, but the parent could direct the child’s inheritance to be held by a trustee who would then administer that child’s inheritance according to terms that would allow the child to have uninterrupted government services and also have funds to be used for any of the child’s needs or wants that are not covered by the services he or she is receiving. The parent can designate a trustee to manage the trust, and successor trustees. If there is ever a time that the trustee can no longer serve (dies, becomes incapacitated, or any other reason), or the trustee experiences other personal life circumstances, the money would not be at risk, and someone else would be able to step in to continue managing the child’s inheritance.

There are many correct ways to set this up making the parent feel most comfortable and providing the parent, the child, and all the other children with peace of mind. But one definite wrong way is to do nothing at all.

Some people are aware of the concept of Medicaid planning but are very reluctant because they are not ready to transfer their assets into a trust or as some put it, “give all their assets over to their children.”

Medicaid planning is not all or nothing.

A Medicaid Asset Protection Trust is an irrevocable trust that is utilized to preserve the assets funded in the trust so that those assets are not countable resources for Medicaid long term care eligibility purposes.

You do not have to transfer all of your assets into this trust. The main rule is that assets transferred into the trust will not be counted as your resources for Medicaid purposes and will be sheltered (after the applicable lookback period). The assets that remain out of trust will not be protected and may be countable resources when you need long term care.

If you are not in need of long term care services now, but wish to plan for a potential future need to access Medicaid long term care benefits, it is advisable to transfer some of your assets into the trust, while leaving out of the trust whatever you expect to need for your living expenses, and an additional cushion for an unexpected event, calculated at least for the next five years.

Contrary to erroneous belief, you do not have to be at the very low Medicaid eligibility limits during the full lookback period. Your assets only need to be below the Medicaid eligibility resource limits when you apply for Medicaid.

A very common and straightforward asset to fund in a Medicaid Asset Protection Trust is your home and other real property. In most situations, funding your home in your trust will not change your quality of life, but will begin the protection of what is likely your most valuable asset. Many people choose to fund their home in the trust, while leaving their money out of the trust. Your home, and its equity, will be fully protected five years from the funding. You will continue to have complete access, control and ownership of the money that you leave in your own name, with the risk that this money out of trust will not be protected should you need Medicaid. If Medicaid is needed while you still have the money in your name, you may not be able to preserve the full amount, it may need to be spent down on your long term care expenses, or you may be able to implement certain crisis strategies to preserve all or some of the money at the time. But at least your home, and other valuable assets that you transferred to your trust will be preserved.

Case Study: Charlie owns his home valued at $900,000 and has $500,000 in his combined checking, savings, and investment accounts. In July of 2016, Charlie established a Medicaid Asset Protection Trust and transferred his home to the trust. He left his liquid funds in his own name. Since then, Charlie continued to live at home, and spent his money on his regular expenses and some nice vacations. In December of 2022, due to a sudden medical event, Charlie becomes a resident of a nursing home. He is interested in applying for institutional Medicaid. His home is fully protected in the trust, but he has $300,000 left in his combined accounts. In 2023, New York Medicaid resource limit is $28,133. He can’t transfer the rest of the money to his trust or a child because of the lookback period penalty. He consults with his elder law attorney, who confirms that the house is completely protected, and explores the best way to salvage the remaining funds and become Medicaid eligible. (If he was married or had a disabled child, he may have been able to preserve the full amount, but ultimately, a promissory note gift plan is used, also known as a “half loaf” plan, and he is able to preserve about half of his money while the remaining amount is spent on his long term care expenses.)

While he did have to spend some of his money on his care before he became completely Medicaid eligible, with the advance trust planning, Charlie was able to protect his valuable home, and enjoy his money while he was healthy.

With Medicaid planning, there is so much to consider, and the earlier you do, the more available options you will have to achieve more optimal results. As you head into your sunset years, the earlier you talk to an elder law attorney, the better off you will be.