Should I Leave My Disabled Child’s Inheritance to a Sibling to Hold?

For a variety of reasons parents often wish to distribute their estates equally amongst their children but not necessarily to each child outright.  That may be because the child has a disability, substance abuse problem, issues managing money or other financial problems.  Many people attempt to solve this problem by leaving that child’s share to a sibling to “hold and manage” for his brother/sister.  Jack’s tale is a cautionary one against the dangers of employing what would seem to be an “easy” solution.

 Jack’s dad had recently died leaving his estate to Jack and his 2 sisters in equal shares.  But Dad’s will actually left Jack 2/3 of the assets because Jack’s sister Mary has special needs.  She is not capable of managing her money and would lose her government benefits if she received her inheritance outright.  Jack, however, was just diagnosed with Alzheimer’s Disease and may need nursing home care within the next few years.  He understands that he will have to pay for that care but he doesn’t want to use Mary’s money for his care.  There’s one big problem.  It isn’t legally Mary’s money.

 You see, Dad specifically disinherited Mary in his will.  It makes no mention of his intent to have Jack take care of his sister.  It just says that Jack inherits 2/3 of the estate.  Legally, it’s his money so if he needs long term care he’ll have to spend down his money and Mary’s, before he can qualify for government assistance.

 What Dad should have done was set up a special needs trust in his will and left Mary’s share to that trust.  He could then have named Jack as the trustee and his sister Helen as a back up trustee.  Mary would not lose her benefits.  Jack would not have to spend down that money for his care.  In fact, he can’t, since the money is not his.  And if he can no longer serve as trustee then Helen can step up.

 Could Jack set up a trust now?  The answer is yes, but because Medicaid rules are quite complicated, the assets transferred to that trust would still subject him to a Medicaid transfer penalty.  If Mary was his daughter and not his sister then he could avoid the penalty.  In other words, Dad could have done it for Mary because of the parent/child relationship.

 What Jack’s problem shows us is that sometimes the “easy” solution creates problems that are far more complicated to solve than the original problem.  While it’s possible that Jack may still be able to protect Mary’s inheritance it is far from certain, and much will depend upon how long he stays healthy.