If you have an heir with special needs, they may qualify for certain government benefits. For instance, these could be provided under Medicaid or Social Security disability benefits.
In some cases, people with special needs have to pass a means test. This measures their available assets and income. If those assets are too high, they do not qualify for these critical benefits. They have to spend the assets down first.
In this sense, directly leaving an inheritance to someone with special needs could be problematic. If you leave someone $200,000, their wealth may suddenly increase so far that they are disqualified from the benefits that they need. They have to spend their entire inheritance, and then they have to reapply for the benefits. But there is a way to get around this issue.
A special needs trust
One common tactic to avoid disqualifying them for benefits is to instead put the $200,000 — or whatever amount you decide to leave them — into a special needs trust. Because it’s in a trust, it doesn’t count as a personal asset. The beneficiary will still pass the means test and retain the benefits that they need.
Meanwhile, the trustee can be instructed to use money from the trust to assist with things that aren’t covered under these benefits. For instance, maybe someone gets benefits for medical care, food and housing, but it doesn’t cover things like a cellphone, Internet access or transportation needs. The trust can be used to supplement their benefits and help them in other ways, without causing them to directly lose those benefits until they spend their inheritance.
It’s important to consider the long-term ramifications when doing this type of estate planning, and you need to know exactly what legal options you have.