If a parent dies and leaves their son or daughter an inheritance to help cover personal costs, the inheritance will be considered an asset and the individual receiving the inheritance will be charged "cost-of-care." Publicly funded residential costs can be expensive, sometimes amounting to several thousand dollars per month. So, having to pay even some of these costs can quickly deplete funds needed for other purposes.
Careful financial planning enables a parent to provide help in purchasing personal care needs after the parent dies without exposing their son or daughter to cost-of-care charges. The local or state mentally challenged services agency can provide information about how that state handles cost-of-care issues.
There are ways that parents can help ensure a degree of financial security for a son or daughter with mentally challenged. Some parents have chosen to disinherit the child with mentally challenged and leave another sibling an additional share with the hope the non-disabled sibling will use the money to benefit the sibling with a disability. This is sometimes referred to as a "morally obligated" gift. Unfortunately, the assets often intended to benefit the child with mentally challenged may not be spent on this person and if the non-disabled sibling is divorced or dies prematurely, the extra funds may be distributed to a divorced or widowed spouse or another heir.
A more reliable method of providing financial security without jeopardizing government benefits is through the use of a Trust.
Trusts hold money or property that the guarantor (the person who sets up the Trust) leaves for the beneficiary's economic benefit. Unlike an outright gift or inheritance through a will, Trusts usually contain carefully written instructions on when and how to use the Trust's contents.
Parents or others can set up a Trust while they are alive or as part of a will. If parents set up a Trust while still alive, they can become the trustee (the person who manages the Trust). They can also assign someone else to be trustee. A trustee can be a person or a financial institution.
A Trust may be designed to distribute assets to one or more beneficiaries at certain times or under certain conditions. Some Trusts make distributions to the beneficiary (or beneficiaries) over a period of time. Others instruct the trustee to distribute just the Trust's earnings or the amount the trustee thinks the beneficiary needs. Some Trusts may require the accumulation of all income for distribution at a future time.
Kinds of Trusts
There are different types of Trusts that serve different purposes. Laws that affect Trusts also vary from State to State. However, most States offer some form of supplemental, discretionary or even cooperative master Trust. These are the types of Trusts usually recommended when parents want to protect their child's government benefits that the person needs. Some of these are referred to as "special needs" Trusts.
Supplemental Trusts - Supplemental Trusts are designed so that the principal and its earnings supplement the beneficiary's care and do not replace the funds required to pay for this same care. This kind of Trust is good for the SSI and Medicaid recipient whose assets cannot exceed specific levels. The Trust guarantor can carefully direct the Trust not to replace the cost of services covered by the Medicaid. Instead, the Trust would require the trustee to only provide funds for certain items, services or other expenses not covered by the SSI and Medicaid. Supplemental Trusts can also be set up for someone who is not on SSI and Medicaid.
Discretionary Trusts - Some states allow the Trust guarantor to give the trustee full discretion of how much or how little of the Trust to distribute. This kind of Trust can also contain provisions that limit distributions so that the person remains eligible for government benefits. The trustee of a discretionary Trust must be very careful not to distribute money from the Trust for goods and services or outright to the beneficiary in a manner that will disqualify the beneficiary from receiving benefits. There are several drawbacks to a discretionary Trust. The trustee must be very knowledgeable about the type of benefits a person is receiving and the related eligibility requirements. The trustee has total power over all distributions and may hold back all Trust distributions to the detriment of the beneficiary.
Master Cooperative Trust- Sometimes referred to as a "pooled Trust," these are special Trusts that some organizations have created to serve families. Instead of setting up an individual Trust account, these types of Trusts allow families to pool their resources with other families. The pooled account is usually managed and invested as one large account. This reduces administrative fees as there is only one account and increases the total amount of principal for investments. Beneficiaries of these Trusts usually receive earnings based on their share of the principal.
Master cooperative Trusts are helpful to parents with smaller estates and parents who have difficulty finding an appropriate trustee. Many chapters of The Art operate these Trusts, so there is more assurance of an informed, sensitive trustee who knows about the care and support of individuals with mentally challenged. Additionally, some master cooperative Trusts will serve people with disabilities other than mentally challenged.
There are basically two ways to set up a legal Trust. It can be testamentary or inter vivo (living).
Testamentary - This means the Trust is a part of a will and does not take effect until after the person who drew up the will dies. Parents can change the trust's terms any time and the will is changed. So, if the intended beneficiary should die first, the will and Trust can change. Tax-wise, this kind of Trust does not require the person to file or pay income tax on it since there are no funds in it until after that person dies.
Inter vivo (or Living) - This means the person sets up a Trust before dying. In doing so, the parents and/or others can make regular gifts to such a Trust. Grandparents can make testamentary bequests from their will to the Trust set up for the child with mentally challenged. Parents can be the trustee and manage the Trust according to their own discretion. They can also assign someone else to be trustee to see how that person would manage the Trust.
Living Trusts are either revocable or irrevocable. This means parents can change a revocable Trust or end it before they die. With an irrevocable Trust, parents set up the Trust and give up most power to change or end it. Both ways of setting up Trusts have different tax advantages and disadvantages according to the size of the parents' estate, family situation and many other factors. Remember, though, it is important that parents or others consult with an attorney about which kind of Trust suits that particular family's financial and tax situation.
