Estate planning when the Beneficiary has a mental illness

Estate planning becomes more complicated when the beneficiary has a mental illness. Then, your estate planning decisions need to take into consideration that illness. If you fail to do so, you may stop someone in Arizona or another location from getting government benefits that they need to survive.

Special need trusts

Setting up a special needs trust requires you to name a trustee to oversee fund distribution. The trustee can spend the money to meet specific needs that the government does not cover under their benefit programs.

How is money in a special needs trust treated?

Government rules and the trust’s wording determine if the money counts as income for the beneficiary. Generally, if the trustee gives the beneficiary cash or uses funds from the trust to reimburse the person with a mental illness for a purchase they have made, the government counts it as income to the beneficiary during the month that the person received the cash. The trustee can make a purchase, not food or shelter, for the person, and it is not counted as income if the person with a mental illness does not resell the item. The government can reduce the beneficiary’s benefits if the trustee provides room and board or pays someone to provide food and shelter.

When can you create a special needs trust?

Anyone can set up a special needs trust for anyone with special needs. The person setting up the trust can fund it while they are still alive and use the funds to help the person with a mental illness. It can also be set up to start when the person funding the trust dies.

If you are considering leaving money to a person with a mental illness, consider using a special needs trust.