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Four Reasons Not to Leave Your Disabled Child’s “Inheritance” to your Non-Disabled Child

Disabled Child Inheritance
Leaving inheritance to your non-disabled child for your disabled child can be risky.

John and Nancy have two children, Michael and Maria.  Maria is disabled and receives a number of public benefits to support her care needs.  John and Nancy intend to leave their entire estate to Michael.  Their logic is that Maria will continue to receive public benefits since she will have no additional assets in her name.  Michael can use “his” inheritance to supplement Maria when she needs it.  Is this the best estate plan?  Probably not, unless John and Nancy are willing to take the risk that the funds set aside for Maria could be lost if something happens to Michael.

We assume John and Nancy created this arrangement because of their trust in Michael.  After all, he could legally use all of “his” inheritance for himself without helping Maria.  However, even the most well-intentioned individuals cannot control factors outside of their own trustworthiness. I often speak of these factors as the dreaded “4Ds”-death, disability, debts, and divorce.  It is the uncontrollable 4Ds that can have an unintended impact on John and Nancy’s plan for Maria.

  • Death. If Michael dies, the funds set aside for Maria pass to the beneficiaries of Michael’s estate who may not feel that they have the same obligations to Maria as Michael did.
  • Disability. If Michael becomes disabled, his team may not know or acknowledge his commitment to caring for his sister and instead liberally spend the inheritance on Michael only.
  • Debt. If Michael loses his job or otherwise encounters money issues, creditors could seek the inheritance to satisfy their claims.
  • Divorce. If Michael were to divorce, the amount set aside for Maria can become part of the divorce “pot” resulting in the set aside to be divided with Michael’s soon to be ex-spouse.

So what do parents with special needs children do in this situation?  Fortunately, public benefits rules create a safe harbor that allows a disabled individual to receive an inheritance while maintaining public benefits.  This safe harbor is commonly called a special needs trust.

Special needs trusts are an important component of planning for a disabled child (even though the child may be an adult by the time the trust is created or funded). These trusts allow a disabled beneficiary to receive inheritances, gifts, lawsuit settlements, or other funds and yet not lose his or her eligibility for certain government programs. The trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining her eligibility for public benefits.

Special needs trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that could not be paid for by public assistance funds. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life.

For more on special needs trusts, including the different kinds of trusts available, click here.

To review whether a special needs trust is a suitable option for your family, contact the Stinson Law Firm at 317-622-8181 or www.stinsonlawfirm.com.