What to do when a Loved One Receiving Public Benefits Receives Unexpected Funds
What can be done to recover important government benefits that are lost due to an unexpected change in a person’s financial circumstances? An unexpected windfall is usually cause for celebration. However, if your loved one receives benefits such as nursing home Medicaid or Supplemental Security Income (SSI), the result may be catastrophic.
Both programs are needs-based benefits, meaning that a person’s income and assets are evaluated to determine whether they qualify. For example, both programs place a maximum value on the assets a person can have and a cap on the person’s monthly income.
It’s not uncommon for beneficiaries of needs-based benefits to receive an unexpected lump sum of money or other property. For example, a well-meaning relative includes the beneficiary in their Will, or names the person as a beneficiary of a life insurance policy. Sometimes people own minerals and don’t even realize it until an oil and gas company wants to start drilling.
The unexpected funds have an impact on both the income test and the asset test, usually causing the person to lose the benefit. For example, if an SSI beneficiary collects a $100,000 life insurance payout and is under age 65, one option is for the beneficiary to establish a “self-settled” special needs trust. The person would be the beneficiary of this trust, and the life insurance proceeds would be transferred to the trust account. The trust must be drafted so that it meets the government’s requirements. One important provision is that any funds left in the trust upon the beneficiary’s death must be paid to the state for all Medicaid expenses paid on their behalf. In Texas, those who receive SSI also qualify for Medicaid benefits. The non-profit Arc of Texas manages pooled special needs trusts and is a good option in many circumstances.
Another option is to enroll in Texas ABLE, which allows individuals with disabilities to have a tax-advantaged savings account without jeopardizing their public benefits. The person must be a Texas resident age 18 or older whose disability occurred prior to the age of 26 (which will change to age 43 in 2026). Total annual contributions to an ABLE account are generally limited to the annual gift tax exclusion, $17,000 in 2023, so if the person will receive more than that, this option will need to be used in conjunction with another. Typically, that includes establishing a self-settled special needs trust. These options also work for someone who inherits as an heir of a relative who died without a Will.
On the other hand, if your loved one receives an unanticipated, outright inheritance under someone’s Will, a better opportunity may be available. Texas law allows a person’s Will to be reformed—after their death—to add a supplemental needs trust to the Will where it did not exist. Instead of receiving an inheritance outright, it’s directed to a supplemental needs trust. This type of trust does not require a payback to the state for Medicaid expenses after the beneficiary’s death. The Will must be probated within four years of death, the representative must formally request a Will reformation from the probate court within four years of the date it is admitted to probate, and finally, the Court must give permission to reform the Will.
The assets placed in a properly drafted supplemental care trust, whether it is self-settled or included in a Will, will not count against the beneficiary’s eligibility for needs-based government benefits such as Medicaid or SSI.
Nothing contained in this publication should be considered as the rendering of legal advice to any person’s specific case but should be considered general information.