Establishing a bypass trust, also known as a special needs trust, is a powerful tool for providing for a disabled sibling without jeopardizing their eligibility for crucial government benefits like Supplemental Security Income (SSI) and Medicaid. These benefits are needs-based, meaning eligibility is contingent upon limited income and assets; a direct inheritance could disqualify them. A bypass trust allows assets to be held for the benefit of your sibling without being considered *their* resources for the purpose of these needs-based programs. This is accomplished by carefully structuring the trust to ensure that the beneficiary doesn’t have direct access to the principal, but rather receives distributions for supplemental needs. The trust should be irrevocable to guarantee that assets are protected from creditors and ensure the ongoing availability of benefits.
What assets can be included in a special needs trust?
A wide array of assets can be contributed to a special needs trust, including cash, stocks, bonds, real estate, and life insurance policies. However, careful consideration must be given to the type of asset and its potential impact on benefits. For example, inheriting real estate directly could create income through rental properties, immediately disqualifying the beneficiary from SSI. Instead, the property can be transferred *into* the trust, and any rental income would be used for the beneficiary’s supplemental needs—things Medicaid doesn’t cover, like vacations, hobbies, or specialized therapies. Roughly 61 million adults in the United States live with a disability, and families increasingly utilize these trusts to ensure their loved ones receive continued care without financial penalties. A properly drafted trust will also specify how remaining assets are handled upon the beneficiary’s passing, often reverting to other family members or charitable organizations.
How do I ensure the trust doesn’t disqualify my sibling from government benefits?
The key to preserving benefits lies in the trust’s terms and the nature of distributions. Distributions must be for “supplemental needs” – items or services that aren’t already covered by SSI, Medicaid, or other public assistance programs. This could include things like therapeutic horseback riding, specialized medical equipment, educational opportunities, or assistance with daily living activities. A “first-party” special needs trust, often funded with the disabled individual’s own funds from a legal settlement, requires Medicaid payback upon their death; a “third-party” trust, funded by someone else, doesn’t. I recall a case where a well-meaning aunt left a substantial inheritance directly to her nephew with cerebral palsy. He immediately lost his Medicaid coverage, and his family scrambled to create a trust *after* the fact, a costly and complicated process. The situation was ultimately rectified, but a proactive approach is always best.
What happens if I don’t establish a trust?
Without a properly established trust, an inheritance or other assets could disqualify your sibling from receiving vital government assistance. This could leave them with limited resources to cover basic needs and force family members to bear the full financial burden of their care. Moreover, even a small inheritance could create a “resource disqualification,” requiring the individual to “spend down” the assets before regaining eligibility for benefits. Consider the story of old Mr. Henderson, a client who came to me after his sister passed away, leaving him a modest sum intended for his disabled brother. He feared losing his brother’s Medicaid and SSI, and rightfully so. We quickly established a bypass trust, ensuring his brother’s continued access to critical healthcare and support. Without it, he would have faced a difficult choice: accept the inheritance and lose benefits, or relinquish the funds.
Can I act as trustee of the special needs trust?
You can absolutely serve as trustee of the special needs trust, but it requires a significant commitment and understanding of the rules governing these trusts. Alternatively, you can appoint a professional trustee, such as a bank trust department or an attorney specializing in estate planning. The trustee has a fiduciary duty to manage the trust assets prudently and make distributions in accordance with the trust terms. I often advise clients to consider co-trustees – perhaps a family member and a professional – to combine personal knowledge of the beneficiary’s needs with professional financial expertise. Ultimately, the goal is to ensure that the trust effectively safeguards the beneficiary’s financial future and enhances their quality of life. Approximately 1 in 4 Americans live with a disability, making this an increasingly important consideration for families planning for the future.
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About Steve Bliss at Wildomar Probate Law:
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Feel free to ask Attorney Steve Bliss about: “How do retirement accounts fit into an estate plan?” Or “How can joint ownership help avoid probate?” or “How do I make sure all my accounts are included in my trust? and even: “What happens to joint debts in bankruptcy?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.