Tuesday, June 23, 2009

A familiar (and unfortunate) story

I met with a client in yesterday who is set to receive an inheritance of about $1.4 million from a trust established by her grandfather. We discussed setting up a revocable living trust as well as an irrevocable trust for asset protection/Medicaid planning purposes. This client (who is divorced) has a special needs child, and we will certainly be providing that, upon the client's death, the special needs child's share will be held in a supplemental needs trust to ensure that the child -- who is now an adolescent -- will remain eligible for governmental assistance throughout her lifetime.

My client also has a sister who will receive the same $1.4 million inheritance from grandpa's trust. This woman, like her niece, has special needs and is presently receiving governmental assistance. Unfortunately, grandpa's trust provides an outright inheritance for this woman. As a result of the inheritance, this woman will become ineligible for governmental assistance, including the all-important Medicaid benefits. To retain her eligibility, the special needs granddaughter will need to create a "payback" supplemental needs trust that, upon the woman's death, will require reimbursement to the state social services agency before any distribution can be made for the woman's heirs.

While this result may be good for taxpayers, it will not provide the optimum result for the family. Had the grandfather's trust provided that instead of an outright distribution, the share of any disabled beneficiary be held in a supplemental needs trust, then upon the granddaughter's death, the balance of the trust share could pass to other family members, rather than to the state.

While grandpa did not ensure protection of the family assets (was he even counseled about this planning option), his "well" granddaughter will be able to assure such asset protection for her own child.

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