When people create a living trust they usually do not plan for unforeseen change of circumstances. They assume that their family members’ current good health and with stable living situations will continue throughout their lifetimes. I recently consulted with a family that had to deal with unforeseen needs of a disabled child that was not anticipated when the parents drafted their living trust.
I had drafted a typical living trust for the parents that left their trust estate to their two children. The clients wanted a simple trust that would be easy to understand and administer. Their trust provided for an outright equal distribution of their assets to their children after both spouses deceased. Years after the trust was drafted one of their children was in a car accident and as a result of injury the adult child required nursing care and medical treatments. The child was disabled pursuant to Social Security guidelines and was receiving government long-term care assistance and SSI income. Because he received SSI the adult child also automatically qualified for Medicaid health insurance and long term care.
After the parent’s second death the disabled child and other family members found out that the disabled child’s inheritance would put his income and assets above the eligibility ceilings for both SSI and Medicaid. The child’s inheritance would be used up to pay for his care in lieu of government assistance he was formally entitled to. The family asked me if there was a way to protect the inheritance and preserve Medicaid eligibility.
In this case there was little that could be done after the parents’ death. It is unfortunate because at the time the parents drafted the trust both children were in excellent health and were financially independent. The parents did not think to change their estate plan after their child’s accident.
I suggests that most living trusts include provisions for contingent special needs trusts. The living trust can provide that any inheritance payable to a child will be diverted to a special needs trust if the child is eligible for government disability assistance at the time of the second death. The inheritance diverted to a special needs trust established by a parent will be protected from creditors including the state Medicaid agency. Assets and income from the inheritance would not affect SSI and Medicaid eligibility of the child.