My spouse has special needs

Planning for government benefits is an entirely separate practice area and needs to be approached from the direction of a specific benefit or benefits the person is trying to qualify for.

Many times in TX, it is one spouse trying to help their newly incapacitated spouse qualify for nursing home benefits through Medicaid.

Spousal Special Needs Trust

You can make any gifts to your spouse in your will subject to a special needs trust in case you are to pass away first. However, this must be done in a will and not in a living trust if the SNT is for your spouse.

Qualified Income Trust

One option is to create a "qualified income trust" sometimes referred to as a "Miller" trust, or a "QIT". In Texas, if an applicant for Medicaid-nursing-home benefits has a certain amount of income that exceeds the income "cap", that person is ineligible for benefits. The cap is indexed to inflation to 300% of the maximum benefit under the Supplemental Security Income program (approximately $2,100 per month in 2014 and $2,200 per month in 2015).

What a QIT does is allow someone with income over the cap amount to still qualify for Medicaid. The trust is funded only with the applicant's income, and the funds in the trust are then used to pay applicant's medical bills and certain personal needs allowances. At applicant's death, any funds left in the trust are used to reimburse Medicaid.

Just to be clear: a QIT is only about helping you qualify for benefits; it has no ability to shelter or protect your income for your beneficiaries.

Lady Bird Deed

Another option is to consider a "lady bird deed". It is also sometimes referred to as an "enhanced life estate deed". It lets you transfer real estate automatically at time of death; but, it also allows you the right to maintain control to all of the property while you're alive without worrying about the concept of "waste" and you can still sell the property while you're alive.

If you transfer the house to your children with a regular deed, or even a regular life-estate deed too soon to your application of benefits (during the "lookback" period), you won't be able to qualify. However, a lady-bird deed fixes this in many states. It fixes it because you maintain control of the deed so you don't fail to qualify based on the transfer. And, then it skips probate because it transfers automatically at time of death.

Lady-bird deeds only work in specific states for Medicaid and only if:

  1. The state Medicaid agency agrees that transferring the remainder interest to your beneficiaries does not create a penalty for eligibility;
  2. The state Medicaid agency agrees that the home won't count after the transfer; and
  3. The state does not extend estate recovery to "retained life estates".

They currently work in Michigan and Texas at the time of writing this article; but, they may not always work in the future.

The lady bird deed has disadvantages unfortunately. Many times, title companies will refuse to insure the sale unless all the remainder interests (the children or spouse) sign off on the sale. This has the effect of vastly limiting your prospective purchasers to cash buyers and any lender exempt from being required by law to have a title policy (not sure if that even exists anymore post Dodd-Frank and T-S.A.F.E. laws). There are new harsh restrictions on owner-finance transactions as well.

So, how do we get around this issue with title companies? By naming a revocable intervivos trust the remainder beneficiary of the lady-bird deed; this way, at time of sale, the owner is still the trustee and can sign off. The children are designated in the trust. It adds some cost to the transaction but takes care of the "selling before death" issue.