People of means, including the very rich, have learned how to transfer wealth to family members with very few estate or gift tax problems. One tried and true method is to make annual gifts of up to $13,000 per year to any number of beneficiaries without tax consequences of any kind. Unfortunately, transfers to family members are not so simple for individuals with disabilities who inherit money outright or receive a personal injury settlement and need to qualify for or keep means tested government benefits like SSI or Medicaid.
For disabled people, a pot of money can pose real problems. They cannot remain eligible for most means tested programs with countable assets greater than $2,000. They cannot give away money in excess of $2000 without losing most means tested benefits for varying periods of time, and even a large personal injury settlement or inheritance can soon be gone without Medicaid assistance because of high medical or nursing home bills.
Establishing and funding a special needs trust with substantial personal injury proceeds or inheritances  may be a partial but far from perfect solution to this problem. A disabled person under 65 can fund (“self-settle”) a special needs trust for his own benefit with personal injury or inherited funds without transfer penalties. The funds in a well drafted special needs trust will not count as assets, thus preserving means tested benefits and providing for the beneficiary’s special needs during his or her lifetime.
Benefitting other family members at the beneficiary’s death is not so easy. Any trust funds left at the beneficiary’s death in one of these self-settled special needs trusts must first be used to pay back Medicaid for benefits paid. Only if the funds remaining are more than sufficient to cover Medicaid’s claims will there be money available for family beneficiaries.
The rules regarding transfer penalties and estate recovery vary from program to program and state to state. SSI has transfer penalties: some Medicaid programs have transfer penalties, others do not. Different kinds of self- settled special needs trusts have distinct establishment requirements and payback provisions. A pooled trust established with a beneficiary’s own funds, for example, will include payback provisions for Medicaid plus retention provisions for the benefit of the not-for-profit Trustee that may completely preclude any possibility of family beneficiaries receiving funds at the disabled person’s death.
Preserving means tested benefits is usually a first priority for a disabled person about to receive a personal injury settlement or inheritance. Good advice and fast action are needed to preserve benefits. Bear in mind that beneficiaries of means-tested programs have an affirmative obligation to inform the government promptly about any changes in circumstances; further, money sitting in a bank account in excess of $2000 at the end of the month may turn into a disqualifying asset.
When benefitting other family members is also a high priority, a plan to make transfers that produce penalties and to use the inherited or personal injury funds to pay privately for needed care during the penalty period may be also feasible. With good advice, it may be feasible to create an even more complex design for asset use that combines a lifetime giving plan producing limited initial eligibility penalties with funding a self-settled special needs trust that may provide benefits later on to family members.
Remember: the rule that permits annual gift tax free transfers of up to $13,000 to any recipient does not mean that such transfers are also penalty free for means tested government benefit program purposes. As is often the case, planning techniques that may make sense for tax purposes do not necessarily produce the desired results for public benefit purposes.