Foresight is the most important aspect of a good estate plan.  While no one can predict the future, we can plan and make provisions for a good number of unknown factors.  This is the beauty of a well-designed estate plan.  There are contingencies built in to prevent undesirable effects.  One example of such a contingency is a Supplemental Needs Trust for a disabled spouse.  To understand how it works, first, let’s assume that Husband and Wife have a joint revocable trust that provides for the survivor of them.  Assume further that they each have a pour-over will that distributes anything not yet transferred to the trust at the time of death into the trust, to be distributed according to the terms of the trust.  This is a very common estate plan.  Most of the time, it is effective because it gives the best chance for avoiding probate and simplifying administration of the estate.

However, if the surviving spouse meets the criteria for being a “disabled person” for purposes of means-based government assistance programs such as Medicaid or Supplemental Security Income, the arrangement described above could bring about some disastrous consequences.  Under many of these means based government assistance programs, an irrevocable trust created by a third party may be considered a disqualifying asset, even if the trustee of the trust has discretion to withhold distributions to the disabled person.  So in our scenario, the surviving spouse could be denied Medicaid benefits or other important benefits they depend on.  This may be a life or death consequence if the assets in the trust are not sufficient to provide for the medical needs of the surviving spouse.

To avoid this undesirable scenario, there are provisions that can be built into the trust and the pour-over will that cause assets in the trust to be “poured over” into the will of the deceased spouse and distributed according to the terms of the will.  These provisions mandate that if the surviving spouse meets the criteria for a “disabled person” in United States Code Title 42, Section 1382c(a)(3), the remaining trust assets  are distributed to the personal representative of the deceased souse’s estate for administration and distribution under the terms of the will.  The will then creates a testamentary trust (a trust that is created through a will) for the benefit of the surviving spouse.  This testamentary trust is called a Supplemental Needs Trust.  The provisions of this trust direct the trustee to only make distributions that do not disqualify the surviving spouse from government assistance, but rather “supplement” the government assistance.  Because testamentary trusts are not considered available assets, this type of trust will not disqualify the surviving spouse from government aid.

In order to be effective, it is important that a Supplemental Needs Trust provision is done correctly.  Additionally, some means based assistance programs at the state level consider even testamentary trusts as disqualifying assets.   If you are considering including a Supplemental Needs Trust provision into your estate plan, you should consult with an experienced estate planning attorney.

For additional reading:

A Supplemental Needs Trust as Part of Your Estate Plan

The Tragic Consequences of Having No Estate Plan

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