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For most people, an inheritance is a windfall. For those receiving certain government benefits, though, it can be a disaster.

They could lose SSI benefits

Even a small bequest can cause people receiving Supplemental Security Income, or SSI, which provides benefits to disabled children and adults, to lose their income and health care coverage. SSI recipients in most states are automatically covered by Medicaid, the government health care program for the poor.

SSI recipients can lose their eligibility if they have assets over $2,000 for an individual and $3,000 for a couple.

Millions of people are affected by these rules. About 5.6 million currently receive SSI, according to the Social Security Administration, and an additional 2.8 million receive SSI and Social Security.

A way to preserve benefits

Parents or other would-be benefactors need to know about special needs trusts, which can help SSI recipients preserve their benefits, says financial planner John Nadworny, author of “The Special Needs Planning Guide.” The trusts typically are created by a will or other estate-planning document that goes into effect when the parent dies.

A trustee manages the inheritance, which can be used to benefit the SSI recipient. The trust can pay for food and shelter, which reduces SSI income no more than about $260 a month. (The average monthly benefit was $542 in April.) Money paid to others to provide medical care, utilities, education and entertainment does not reduce SSI benefits.

Timing matters

Special needs trusts also can be created while the parent or other benefactor is still alive, but that typically makes sense only for the wealthiest families, says Nadworny, a CFP professional with Shepherd Financial Partners in Winchester, Massachusetts. People who have estates worth more than $5 million may want to put money into a special needs trust to shelter it from estate taxes, but the gift is irrevocable — which means it can’t be reversed — and assets in the trust quickly incur high marginal tax rates, Nadworny says.

Most parents are better off holding on to their assets and bequeathing them to disabled offspring with a special needs trust created at their death, he says.

ABLE accounts under development

New tax-free accounts for the disabled, approved in late 2014 by Congress, won’t erase the importance of special needs trusts, advisers and estate planners say. The Achieving a Better Life Experience (ABLE) Act accounts will allow families to set aside $14,000 a year for children and other beneficiaries who are disabled before age 26. SSI and Medicaid recipients will be allowed to have up to a $100,000 ABLE account without affecting their eligibility for these benefits.

The accounts aren’t yet available, although most states have started the process to offer them through their 529 college savings plan administrators. Even when the accounts are up and running, though, parents of the disabled will still need to consider special needs trusts for inheritances, Nadworny says.

“It’s really comparing apples and oranges,” Nadworny says. “One is for saving, the other is for estate planning.”

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