Despite your good intentions, naming your disabled niece as the beneficiary of your life insurance policy may not do her any good whatsoever. In this final installment in this series, I explain why disabled beneficiaries should be handled with extreme caution. This advice actually applies to all manner of property given to a disabled person - including property distributed under a Will. The reason for caution is this: an inheritance from any source could disqualify the disabled person from receiving public benefits.
Many disabled people (children and adults) receive disability benefits through the Social Security Administration (SSA). The SSA administers two separate disability programs, disability insurance and supplemental security income (SSI). (See Have I Worked Enough to Qualify for Social Security Disability Benefts?). The SSI program is means tested. Thus, in addition to proving disability, the applicant must be below a certain level of means (e.g. income and resources). SSI benefits are particularly important as the disabled person receives not only a monthly cash benefit but health insurance through Medicaid. A sudden increase in resources may disqualify the person from both their cash benefits and, more importantly, Medicaid.
Imagine this situation. You loved your disabled niece so much that you named her as the beneficiary of your $100,000 life insurance policy. After your death the insurance company sent her a check for $100,000. Your niece (or her guardian) deposited the check into her account and the next month SSI notified her that her monthly checks were stopping and that she is no longer eligible for Medicaid. Your niece then used the life insurance proceeds to pay for doctor’s bills and basic survival as she had no other income. A year later she again is eligible for SSI and Medicaid as she has exhausted the $100,000. What exactly did she get as a result of your generosity? Nothing.
There was a way to have made your generosity count. A special or supplemental needs trust (SNT) is a trust that receives property and holds it for the benefit of a disabled person. If the SNT was drafted correctly, your disabled niece could have received the life insurance proceeds and still qualified for SSI. Thus, she could have continued to receive her cash payments and Medicaid. A properly drafted SNT does not impact SSI eligibility because a) the money is owned by the trust (not the disabled person) and b) the money in the trust is not available to the disabled person for basic needs such as food, shelter, and housing.
SSI benefits are for food, shelter and housing. If the disabled person has access to trust funds that could pay for food, shelter and housing, the trust funds are considered “available” to the disabled person. These available resources would most likely disqualify the disabled person for SSI benefits.
But what’s the point of putting the money into this SNT if your niece cannot use the money for food, shelter and housing? Because our niece can use if for everything else! She could buy a computer, a car, or go on a vacation! So long as the funds are not used for food, shelter and housing, they can be used for anything else. In this way your life insurance proceeds could be used to enhance the quality of her life.
It should be apparent at this point that if your estate planning involves property going to a disabled person it is imperative that you discuss your
options with a qualified estate planning attorney.