Q. I don’t have any children and would like to leave most of my estate to my niece. I don’t have a huge net worth but I meet all of my expenses with my pension and Social Security and unless some unforeseen medical emergencies arise, I will not need to touch my savings and investments.
My sister has warned me not to leave her anything outright since she is on Social Security Disability. My sister is understandably overly protective of her daughter but she also has a tendency to act like she knows more than she does which can complicate matters.
She suggested I establish a trust and leave my estate to her daughter via the trust. This seems like a lot of trouble but my sister says I could put her daughter’s benefits in jeopardy if I don’t establish the trust. Is a trust really necessary? Do I have to hire a lawyer?
A. In this instance, your sister knows what she is talking about. You won’t do your niece any favors if you leave her an outright inheritance. This could, in fact, jeopardize your niece’s ability to receive Supplemental Social Security Income (SSI) and Medicaid benefits.
If a gift or inheritance disqualifies her from receiving SSI or Medicaid after the asset is diminished, she would have to reapply and requalify for benefits, which is not an easy task.
If you set up a supplemental or special needs trust and leave property and assets to the trust she will not lose her benefits. To be a qualified trust it must comply with SSI and Medicaid requirements.
The trust must be for the sole benefit of the special needs beneficiary and irrevocable — once established it cannot be changed. No additions can be made once the trust beneficiary is 65 years old.
Unlike other types of trusts, you cannot be the grantor and the trustee; you must name another person. The person you designate as trustee will have complete discretion over the trust property and will decide how to spend the money on the beneficiary’s behalf.
Distributions from the trust may supplement and enhance the beneficiary’s well-being but may not provide for basic life needs such as food.
Distributions can be used for non-basic life needs such as vacations, home furnishings, personal care attendants, education, out-of-pocket medical and dental expenses, mental healthcare, technical equipment that will enhance the person’s life and vehicle improvements to protect the person’s safety.
I think hiring a lawyer makes sense, but there are do-it-yourself guidebooks and Internet resources for these types of trusts.
If your sister already has a special needs trust, check with her or her lawyer and see if you can use that same trust in which to leave your estate.
You may also want to consider Special Needs Pooled Trusts. These trusts are run by non-profit agencies and may be a good alternative to creating an individual trust if your estate is small and/or if you can’t come up with a trustee.
The agencies make investments with the combined assets and funds are distributed to beneficiaries based on their portion of the total amount. These may not be as flexible as an individual trust.
They may only make distributions certain times of the year, investment selections may be limited and once assets are in a pooled trust it may be difficult to move the assets to another trust. Compare the cost of set-up fees, annual fees and investment fees with any type of trust.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624