Making a gift outside the trust can sometimes cause problems

In general, everyone likes to get gifts, and most people like to give gifts as well. Yes, yes, we often see bickering about who got more and who got less, and who deserved more or who deserved less, but that’s a discussion for another day.

Gift giving and receiving can be fun, and even more so when it’s unexpected. But, there are times when giving someone a gift can cause a problem for the beneficiary. This is often the case when the person receiving the gift is on disability and the gift causes them to lose their disability.

I had a woman come to see me because she had been named as a beneficiary of about $25,000 from the estate of a deceased aunt. Rather than being happy, the woman was very upset. It had taken her three or four years of effort to qualify for disability income, and now this inheritance was going to disqualify her from her disability income unless she took some immediate and unwanted actions.

Many attorneys include a supplemental needs trust provision for any beneficiary who will receive an inheritance while they are on disability, but some don’t. That can result in a very bad outcome for the disabled person. In the case I just mentioned, the aunt had no knowledge that the niece was on disability, so the thought probably never came to her that she should discuss this with her attorney.

In another case, the mother had a trust prepared that divided everything into equal shares for her three daughters, but nobody ever considered the problems this might cause for the disabled daughter, and the attorney who drafted the mother’s trust didn’t include any provision to protect a disabled beneficiary.

Who is disabled? Well, people often know, but maybe someone who isn’t disabled at the time the trust is prepared, later becomes disabled from some illness or accident.

That’s why the supplemental needs provision should always be included in the trust. It’s one of those “just in case” provisions that could prove critically important to the beneficiary.

Even though I always include the supplemental needs trust provision, certain assets pass outside of the trust. My client, who had two adult children and one granddaughter in her 20s, had a large IRA account that would pass by beneficiary statement and not through the trust. She loved her granddaughter, so she wanted to earmark a portion of the IRA for the granddaughter, and she did so without discussing it with me.

Anything passing to the granddaughter through the trust would have been placed in the supplemental needs trust for the benefit of the granddaughter, but not the portion of the IRA that was left directly to the granddaughter outside of the trust.

The result was the parent of the granddaughter had to scramble and set up a less desirable first party “pooled trust” to protect the granddaughter’s disability income. It wasn’t the outcome anyone wanted, but the grandmother wanted to show her love and kindness toward the granddaughter, and she failed to consider her generosity could have caused the granddaughter a serious problem.

Had my client only told me that she wanted some amount of money to bypass her children and go directly to the granddaughter, we could have used other assets in the trust for this, and the granddaughter’s disability income would have been protected and the parent wouldn’t have had to unnecessarily spend money and jump through immediate steps to get her a separate, pooled trust.

Jim Ward is a longtime South Valley resident with his JD degree from New England and his LLM Estate Planning specialization degree from Florida. Jim has offices in South Valley and Willow Glen, and he also owns J. Ward Financial in Morgan Hill for wealth management services. He is a Master Elite Advisor for Ed Slott’s IRA Advisor Group and he holds the certifications of CFP®, RICP®, and CRPC®.