When drafting an estate plan, it can be helpful to think about the consequences of the distribution of your assets. Even if it feels very straightforward, there could be unintended consequences that you would be better off avoiding. Planning in advance can help you do so.
One example is if you have a beneficiary with special needs. This individual may not be able to earn a living, so they may rely on certain government benefits.
Often, to qualify for these benefits, they are required to report all income and assets that they own. They need to pass a means test. If you leave them an inheritance, it could increase their personal net worth so that it is too high, and they are disqualified from the benefits that they need. They may have to spend the inheritance down before they can reapply for benefits.
How can you avoid this issue?
One way to avoid this problem is by setting up a special needs trust. Instead of giving the money to the beneficiary directly through your estate plan, you fund the trust and list them as the beneficiary, while simultaneously choosing a trustee to administer the assets.
By doing this, the trust owns the assets, so they do not count as part of the beneficiary’s personal wealth. This way, they still qualify for the benefits that they need. The trustee can then use the funds to help them in other areas that benefits may not address.
This helps to show why planning in advance is so important. It is crucial that you understand exactly what options you have to create an estate plan that will work well for your family.
