If you have a disabled family member, you should consider creating a special needs trust for his or her benefit

Dear Len & Rosie,

I am the Social Security Representative Payee for a neighbor. He is disabled and receives Social Security and Supplemental Security Income Benefits plus Medicare. Recently his father died and he is a beneficiary to the will. I have no idea how much money will be received but this man seems to think it will be a considerable sum.

Recently I heard that my friend could have a “d4A” trust prepared in order to protect his inheritance and still receive Social Security benefits. Who do I speak to to create such a trust? At this point in time, neither he nor I have money to hire a lawyer so is it possible for me to do this on my own?

Sharon

Dear Sharon,

Your friend is on SSI (Supplemental Security Income), which means he can own only $2,000 in “countable” assets. A special needs trust would shelter his inheritance from causing him to lose his SSI.

His father should have created a special needs trust as part of his estate plan, but he did not. It is still possible to create a special needs trust, but you’ll have to jump through a few hoops. A “d4A” special needs trust is shorthand for a trust created under 42 U.S.C. section 1396p(d)(4)(A) - the specific code section in federal law that authorizes the creation of these kind of trusts. The good news about d4A trusts is that if your friend gets one, his inheritance will not cause him to lose eligibility for SSI, Medi-Cal, and other needs-based public benefits.

The bad news about d4A trusts is that they must include a provision requiring the trustee to pay off Medi-Cal after your friend’s death before distributing what’s left to the beneficiaries named in the trust. Also, these trusts must be created by a living parent or grandparent, or by an order of the court. Your friend must also be under sixty-five years of age.

It’s not surprising that your friend doesn’t have the money to pay a lawyer to petition the court to create his special needs trust. His income from SSI is hardly enough to pay for his basic needs. But the lawyer fees can be paid from your friend’s inheritance after the trust is created. The procedure to go about creating the trust is a bit complicated, and we doubt that you’re going to find out how to do it in any self-help book. See a trusts and estates attorney.

But before you and your friend do this, he should think about whether or not he needs a special needs trust. If his inheritance is large enough, and he also has Medicare benefits, he may wish to accept his inheritance outright, drop his SSI benefits, and live off of his inheritance without the restrictions of a special needs trust.

And for the rest of our readers out there, take this as a lesson. If you have a disabled family member, you should consider creating a special needs trust for his or her benefit as part of your own estate plan.

Len & Rosie

Long Term Care Insurance

Dear Readers:

There is a gap in coverage for medical care. Medicare will pay for most of your medical expenses as you grow old, especially if you purchase a Medicare supplemental insurance policy that can handle copayments and even prescription drug purchases. Medi-Cal is available for long term nursing home care, and can usually be obtained when needed with a bit of Medi-Cal planning.

The coverage gap is for people who need assistance and supervision with the activities of daily living, but who aren’t so poorly off as to require nursing home care. Regretfully, some nursing home patients fall into this category, because they can’t afford to pay for assisted living, board and care homes or in-home caregivers that would provide them with more comfort and freedom.

While there are some programs that help pay for in-home care, such as In Home Supportive Services and the Veteran’s Administration Aid & Attendance program, most people who need care giving short of being in a nursing home have to pay for it on their own dime.

There is an alternative. Long term care insurance has been available for years. There are restrictions of course. They won’t let you buy a policy when you already need care, so you have to do it sooner rather than later. You also have to be particularly careful about the terms of the policy. You also want to make sure that the insurance will pay for care in your own home. After all, that’s the goal.

The good news is that there is an alternative to traditional long term care insurance policies where you may receive no benefit at all unless you actually receive long term care. There are now insurance companies selling life insurance with a long term care rider. The financial advantage of such a policy is that if you don’t actually need to use the long term care insurance, your family will still be able to collect on the life insurance upon your death. 

If you have an existing life insurance policy, you can cash it in and buy a new policy with the long term care rider in a Internal Revenue Code section 1035 tax free exchange. There is also now a means by which you can use retirement account money in an IRA to buy this sort of insurance.

We have seen a case in which a person sold his $250,000 insurance policy in exchange for a $250,000 policy with a long term rider. When he took ill, the insurance paid out $10,000 a month for five months for care in his own home, and his family inherited the remaining $200,000 upon his death.

Long term care insurance isn’t for everyone, and people have shied away from it due to its cost. However, the opportunity to invest in life insurance with a guaranteed payout and long term care coverage can make providing for caregivers much more affordable.

Len & Rosie