What Happens to Trust Funds After the Death of a Disabled Beneficiary?

 In Special Needs Planning

Question:

The wealthy sister of a resident in one of our group homes set up a trust for her. However, the resident was diagnosed with metastatic cancer and is expected to die, leaving a large amount of money in the trust. After her death, how can the sister use the money, or does that depend on the specific wording in the trust and the who the disabled sister has designated in her will?

Response:

It depends on the wording of the trust. The trust should say who will receive what’s left when the disabled beneficiary passes away. What’s left is often called the “residue” and the provision of the trust saying what happens to it is called the “residuary clause.” These terms are used for the same provisions in wills. The will may say that specific items or specific amounts of money go to particular individuals or charities, and the say the residue goes to another person or people.

Fortunately (except, perhaps for the taxpayers), the residue of a third-party special needs trust, such as the one you describe, does not have to go to the state to reimburse it for its Medicaid expenses on the beneficiary’s behalf. If the trust were a safe-harbor (d)(4)(A) or (d)(4)(C) trust, the state would have first dibs on the residue, with named residuary beneficiaries collecting only what’s left, if anything, after the state is entirely reimbursed.

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