As retirement nears, those with disabilities may face complex questions about their benefits, especially with an inheritance involved. If you’re receiving disability benefits and have recently received or are expecting an inheritance, you might wonder how this financial change will affect your benefits.
To understand the impact of an inheritance on your disability benefits, it’s essential to know which type of disability benefits you are receiving. The two main programs are Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Each program has its rules regarding how an inheritance can affect your benefits.
In this article, we’ll explore how inheritance impacts SSDI and SSI benefits and strategies for managing an inheritance while preserving your benefits. Please remember that this material is not intended to be legal advice but is meant to be informative only. For personalized legal counsel, consult a qualified attorney specializing in disability benefits.
Understanding Inheritance in the Context of Social Security Disability
What is an Inheritance?
In legal and Social Security terms, an inheritance is any cash, rights, or non-cash items received due to someone’s death. This can include money, property, or other valuable assets. Frequently classified as a “death benefit,” an inheritance is not regarded as income until it has material value that can be applied toward necessities like food or housing.
If an inheritance was considered a resource for the deceased individual right before their death, it does not count as income for the heir. However, this rule does not apply to proceeds from life insurance policies, which are treated differently.
For example, if you inherit a house, its value must be assessed under the Property Market Value (PMV) rule within the month of receipt if you use it for shelter. This rule ensures that the value of inherited property does not affect your benefits unless it’s being used for basic needs.
Impact on SSDI Benefits
SSDI and Inheritance
To be eligible for Social Security Disability Insurance (SSDI), a person must have made substantial earnings-related contributions to the Social Security system over a minimum of ten years. SSDI is an entitlement program funded by these contributions, so the primary eligibility factor is work history rather than financial resources.
In essence, SSDI benefits are not affected by income other than earned income, including inheritance. The program is designed to support those unable to work enough to support themselves due to a disability, so receiving an inheritance does not impact SSDI benefits.
Situations That Can Affect SSDI Benefits
- Substantial Gainful Activity (SGA): Engaging in work that earns more than the SGA limit can lead to the termination of SSDI benefits. For 2022, the SGA limits are $2,260 for blind individuals and $1,350 for non-blind individuals.
- Loss of Qualifying Disability: SSDI eligibility requires the ongoing presence of a qualifying disability. If your condition improves to the point where you can return to work full-time, your benefits may be terminated.
- Reaching Retirement Age: Benefits from SSDI will convert to retirement benefits after you reach full retirement age (FRA). For people born between 1943 and 1954, FRA is 66; for those born after 1960, it gradually increases to 67.
- Conviction of a Serious Crime: Convictions for felonies may result in a temporary suspension or permanent loss of benefits.
Because an inheritance does not count as earned income or substantial gainful activity, it does not affect SSDI benefits.
Impact on SSI Benefits
SSI and Inheritance
Supplemental Security Income (SSI) is a needs-based program designed for individuals who are aged, blind, or disabled and have limited income and resources. Unlike SSDI, SSI benefits are heavily influenced by the recipient’s financial situation, including income and resources.
How Inheritance Affects SSI
For SSI purposes, income includes:
- Earnings from work
- Payments from the government or worker’s compensation
- Financial gifts from family or friends
- Free food or shelter
In 2022, the SSI income limit for individuals is $841 per month and $1,261 for eligible couples.
Resources include:
- Cash
- Bank accounts, stocks, and bonds
- Property (excluding the home you live in)
- Vehicles
- Personal belongings
- Life insurance policies
The 2022 resource limits are $2,000 for individuals and $3,000 for couples. If the value of your inheritance, combined with your other resources, exceeds these limits, your SSI benefits could be affected.
Managing Inheritance with SSI Benefits
If you receive an inheritance and are concerned about losing your SSI benefits, consider the following options:
- Spend Down: Use the inheritance to purchase exempt items such as a home or vehicle or to pay off debts. This reduces your countable resources and helps maintain SSI eligibility.
- Special Needs Trust (SNT): An SNT can hold your inheritance without counting it as a resource, allowing you to continue receiving SSI while using the trust funds for supplemental needs.
- Gifting: You can give away some of the inheritance, but be mindful of gift tax rules and potential impacts on Medicaid eligibility.
Understanding Special Needs Trusts
What is a Special Needs Trust?
A special needs trust (SNT) is a legal arrangement that allows an individual with disabilities to receive funds without losing eligibility for needs-based government benefits like SSI. In an SNT, a trustee manages the assets on behalf of the beneficiary. The trust is set up by a grantor, who could be the beneficiary or someone else, such as a family member.
Types of Special Needs Trusts
- First-Party SNT (Self-Settled Trust): This trust is funded by the beneficiary’s own assets, such as an inheritance or personal injury settlement. It must be established before the beneficiary turns 65 and must be irrevocable, meaning it cannot be changed once set up. Federal law requires Medicaid reimbursement from the trust upon the beneficiary’s death or trust termination.
- Third-Party SNT (Supplemental Needs Trust): This trust is usually supported by a parent or grandparent, not the beneficiary. It allows the grantor to determine how the monies are allocated after the beneficiary passes away and does not require Medicaid reimbursement.
The type of SNT that is most beneficial for you depends on your specific circumstances. An experienced lawyer can determine the appropriate course of action for your circumstances.
Reporting an Inheritance to the SSA
Regardless of the disability benefits you receive, reporting any inheritance to the Social Security Administration (SSA) is crucial. Failure to report can lead to issues such as overpayment of benefits and potential penalties.
For SSI recipients, reporting an inheritance is mandatory, as it could impact their eligibility. The SSA will assess whether the inheritance counts as income or a resource, which could affect their SSI payments.
Managing Inheritance to Maintain SSI Eligibility
Spend Down: Reduce countable resources by purchasing exempt items or paying off debts.
Special Needs Trust (SNT): Set up an SNT to protect your inheritance and maintain SSI eligibility.
Gifting: Distribute a portion of the inheritance while considering gift tax implications and effects on Medicaid eligibility.
Speak with a financial advisor or lawyer to determine the optimal course of action for handling your inheritance and protecting your advantages.
Impact on Medicaid Eligibility
Medicaid, like SSI, is a needs-based program with strict income and resource limits. An inheritance could push you over these limits, potentially resulting in a loss of coverage. Using an SNT can help protect your inheritance and maintain Medicaid eligibility.
Planning for Future Inheritances
If you anticipate receiving an inheritance while receiving disability benefits, proactive planning is essential. Consult a financial advisor or lawyer to learn more about estate planning techniques that will safeguard your advantages and maximize the value of your inheritance.
Professional Guidance
Navigating the complexities of inheritance and disability benefits requires expert guidance. A knowledgeable lawyer with experience in disability law can help you determine your options, comprehend your rights, and make wise judgments. They can also help you set up an SNT or other legal arrangements to protect your benefits.
For further details Contact Plan Benefits today!
