HOW CAN INHERITING MONEY MAKE YOUR LIFE MUCH WORSE?

It can if you're a person with a disability who's dependent on government services such as Supplemental Security Income (SSI) or Medicaid to provide for basic needs such as rent or grocery bills. (SSI is a federal program to help those with disabilities and those over 65. One doesn't need to have ever worked to be eligible. Medicaid is health insurance provided by the government to the poor and disabled.)

Despite the Americans with Disabilities Act of 1992, many people with physical or mental disabilities remain unable to find gainful employment, and thus require the living support provided by SSI.

In addition, they may be unable to obtain decent, affordable commercial health insurance, due to classification of their disabilities as "pre-existing conditions." For such a person, Medicaid, with no monthly premiums to pay and with its capacity to cover large, ongoing medical costs, may well be another life necessity.

But to maintain eligibility for such programs means basically to be impoverished, with limits on income and not more than $2,000 in cash to one's name, although ownership of a house and a car and other necessary possessions is permitted with restrictions. Given these parameters, a person can maintain a minimal lifestyle but without any income for the small pleasures or amenities.

THE GIFT THAT WON'T KEEP ON GIVING

A financial windfall such as an inheritance may initially seem welcome, and may have been intended to augment and improve the beneficiary's lifestyle. But the possession of large financial assets can disqualify a person with a disability from receiving Medicaid and SSI.

(Note: Those who receive benefits from Social Security Disability (SSD) -- sometimes just called "disability" -- generally won't have those benefits threatened by an inheritance, since SSD eligibility is based on a person's medical situation and work record, not on financial status.)

After SSI and Medicaid benefits cease, the inheritance itself, rather than supplementing the person's lifestyle, becomes the only resource to draw upon for rent, food and medical care. Depending on the size of the person's monthly medical and living costs, the "windfall" can be eaten away in a relatively short time, returning the person with the disability to his former impoverished state.

Then there may be a reassessment period of several months during which the person has to re-establish his Medicaid/SSI eligibility, with no resources to pay for rent, doctor bills and other expenses. Assuming the person weathers this precarious interim period, at best he may then hope to end up as he was before the inheritance, relying on government programs with nothing in the bank to make life a little more livable.

There is a solution, an alternative strategy called the Special Needs Trust, a fund designed to hold supplementary resources which can contribute to the designated person's quality of life without disqualifying him from receiving government benefits.

A trustee, often a family member or friend, is appointed to manage the account. In general, this should be someone familiar with the situation and sympathetic to the designated beneficiary.

MAKING IT WORK

An experienced attorney familiar with government benefits is needed to make sure that the trust agreement is precisely worded so that the person with the disability is perceived to be the beneficiary and not the owner of the funds in the trust.

In addition to an attorney, a financial planner should perform a capital needs analysis so parents can determine how large the trust needs to be to pay for additional costs. It's also necessary to determine what existing resources may be used to fund the trust. One way to provide funds for a trust is to set up a life insurance policy that will pay into the trust on a parent's death.

The trustee will have the ability to provide the supplementary assistance that he deems necessary, perhaps for such costs as books, videos, travel and medical care not covered by Medicare, but the funds from the trust aren't meant to be used for housing, clothing or other essentials.

A trust that is established while the parent or guardian is alive is called an Inter Vivos Trust. However, if a parent leaves instructions in his will that a trust be created upon his death, it's called a Testamentary Trust.

A Revocable Trust is one that allows the parent, while alive, to change the terms of the trust. An Irrevocable Trust can't be so modified. Upon the parent's death, a Revocable Trust becomes an Irrevocable one.

Another possibility, if no suitable person is available, is to name a bank as the trustee. As a trustee, a bank has stability in its favor, but it can't be counted on to care or take a genuine interest in the beneficiary.

OTHER OPTIONS

There are many other kinds of trusts and estate planning strategies, each with subtle distinctions.

A number of families can pool their resources to form a Master Trust, a nonprofit entity which has a designated trustee to undertake the disbursement of funds and which can provide other services to various persons with disabilities. But a Master Trust must be well maintained and continually marketed to bring in new participants or it may fail in a few years.

An alternative that will ensure that someone else makes financial decisions on behalf of a person with a disability is to appoint a guardian. This option is definitely problematic since it requires the person with the disability to be declared incompetent to manage his own affairs. If the person with the disability is able to partially manage his own situation, some other alternative may be preferable.

A Uniform Gift to Minors Account (UGMA) might be useful, especially if established well before the child reaches adulthood. A UGMA is somewhat like a trust and allows a parent, gradually or not, to place a large amount of assets aside for a child.

A UGMA presents tax advantages to the parent and allows the parent to manage the investments in the account. But once the child reaches adulthood, the assets may have to be placed in a Special Needs Trust to preserve SSI and Medicaid eligibility, and even then it's possible that the prior existence of a UGMA may interfere with the receipt of benefits.

It may seem that there are many uncertainties involved in this kind of financial planning, but on one point there can be no uncertainty: If you're a parent with a disabled child, you need to have a will. The will should clearly state your intentions for the disposition of your estate and outline instructions for a trustee or guardian, if needed, for any children with special needs.

Healthy siblings of disabled children need to be properly recognized in the will. Try not to slight them in favor of the child with the disability, especially if you intend the nondisabled siblings to serve as trustees or caretakers after you're gone. Siblings may already feel "passed over" because of the understandable necessity of paying more attention to the special needs child. The will shouldn't provide yet another instance of this.

Talk to your legal and financial advisers and get the ball rolling. When you consider all assets -- a house, life insurance, retirement accounts -- you may find you have a larger estate to leave than you realized. At any rate, the sooner you start planning, the better for all concerned.

RESOURCES

What's Left? Who's Left? The Layman's Handbook for Estate Property Management and Survivor's Guide to Personal and Financial Well-Being by Teresa Pedicino (1996, Tristus Publishing) is a comprehensive volume targeted mainly at survivors and estate beneficiaries. But the book offers a great deal of information useful to anyone thinking about planning their financial future, with chapters on trusts, wills and probate, property ownership, investing and much more. The 348-page guide, which includes tearout sections and forms, costs $24.95, plus $5.95 shipping and handling, and can be ordered by calling (800) 730-3043.

National Special Needs Network, which maintains a Web site at http://www.nsnn.com/, is an affiliation of special needs professionals, including estate attorneys, investment professionals, trust managers and care managers. For more information, write to National Special Needs Network Inc., 8041 West McNab Road, Tamarac, FL 33321 or call (954) 721-1020.

Another resource is the National Institute on Life Planning for Persons with Disabilities, which you can reach through its Web site at http://www.mac.edu/~rfee/nilp.html or by e-mailing rfee@mac.edu.

You should expect to pay for financial planning services, and it's wise to do your own careful research before hiring anyone, even if they are recommended or referred to you by any of the resources above.