Dear Harry,
I am a disabled adult living with my parents. When they pass away would it be better for them to set up a special needs trust so that I can continue living in the home without it affecting my government benefits, or would it be better if they let my brother inherit the house and have me pay him rent to live there? If they set up a special needs trust for me, will they still own the house until they die? They are afraid of doing anything but I don’t want to end up homeless.
Dear reader,
I would definitely recommend that your parents create a special needs trust to hold the house for your benefit. That way, as you suggest, you can continue to qualify for any public benefits you need for your support while still protecting the home. If the house were to pass to your brother, it could be at risk. Even if he has the best of intentions, if he were to run into financial trouble, got divorced, or died before you, the house might have to be sold and you might not receive anything from the proceeds.
That’s the short answer. As always, the complications are in the details. Your parents could transfer the house into trust now or arrange for that to happen when they pass away. In most instances, it won’t matter which route they take as long as they execute their wills and the trust now.
However, if one or both of your parents were to need long-term care, especially nursing home care, the house could be at risk to Medicaid estate recovery for the state to recover its costs of paying for their care. Medicaid law allows them to protect the house from such a claim by putting the house in trust for your benefit at that time. But such a trust, sometimes referred to as a “(d)(4)(A)” trust referring to the authorizing statute, has certain limitations. The primary one is that upon your death the state must be reimbursed for Medicaid payments it may have made on your behalf (though not in that case for payments on behalf of your parents).
This is not the case for a standard “third-party” special needs trust created without regard to your parents’ eligibility for Medicaid, which can be an argument for creating the trust and transferring the house into such a trust now. But there are other considerations as well. For instance, do your parents need access to the equity in the home? Is it fair to your brother for the house to go entirely to you? Do you have sufficient income to maintain the house if it were placed in trust for your benefit?
Given these myriad intertwined issues, I recommend that your family consult with a special needs planner. There are two good organizations of these experts, the Academy of Special Needs Planners and the Special Needs Alliance.