Let’s say you receive an inheritance while also receiving disability benefits, or you expect an inheritance soon after receiving an approval for your disability claim application.
You may wonder, “How does an inheritance affect my Social Security disability benefits?”
The answer depends on which of the two disability benefits programs you are enrolled in: Social Security disability insurance (SSDI) or Supplemental Security Income (SSI).
In this article, we’ll discuss the possibilities for each type of disability benefit. We’ll also touch on how SSI recipients can benefit from an inheritance without losing their benefits.
Please note that this article is purely informational and does not constitute legal advice in any way. If you require legal counsel, please seek a qualified disability benefits attorney.
Let’s begin by diving into how Social Security defines an inheritance.
What is an Inheritance?
Social Security defines an inheritance as “cash, a right, or a noncash item(s) received as the result of someone’s death.”
An inheritance is considered a “death benefit.” Until the inheritance has a value (i.e. is usable for the heir’s basic needs such as food or shelter), it isn’t considered income or a resource. The inheritance is income only in the first month it has value.
If the inheritance was considered a resource for an heir or beneficiary immediately prior to the death of the person leaving the inheritance, it will not be considered income. This can occur with eligible couples or through deeming of resources. However, the rule does not apply to proceeds from a life insurance policy.
A house bequeathed in an inheritance must be valued under the PMV rule within the month of receiving it if the individual is using that house for shelter.
This is just basic information, and each situation of inheritance is unique. You may want to consult an attorney to navigate your particular circumstances.
Now that we’ve established Social Security’s definition of inheritance, we can unpack how the receipt of an inheritance affects SSDI benefits.
Receiving an Inheritance Does Not Affect SSDI Benefits
To apply for SSDI, individuals must have paid into the Social Security system over a long period of time (at least 10 years, with some exceptions) prior to their disability.
In other words, those who are SSDI-eligible have a significant work history in which Social Security was taken out of their paycheck. Because SSDI funding comes from citizens who pay into the system, it is considered an entitlement program.
SSI, on the other hand, is a needs-based program. We’ll discuss what this means in greater detail in the next section.
Since the primary eligibility factor for SSDI (aside from having a qualifying disability) is work history, the only income that affects SSDI benefits is earned income. That is, any income you make from a job as an employee or from your own self-employment.
This is one of the four common ways to lose your SSDI benefits:
- You engage in substantial gainful activity (SGA).
As stated above, earned income affects SSDI benefits. Disability benefits are designed to assist those who cannot work enough to provide for themselves. If you receive disability benefits and earn any amount over the SGA limit, your benefits will be terminated. The SGA amounts for 2022 are $2,260 for blind individuals and $1,350 for non-blind individuals.
- You no longer have a qualifying disability.
Your eligibility for SSDI depends on your ability to work. With new treatment options becoming available, there is an increased possibility of recovery for a variety of conditions. If your condition (whether physical or mental) improves enough so that you can return to work full-time, your benefits will be terminated.
- You reach retirement age.
Once you reach full retirement age (FRA), you will be switched from SSDI to retirement benefits. If you were born from 1943 to 1954, the FRA is 66. If you were born from 1955 to 1960, the FRA increases gradually until it caps at 67, meaning that the FRA for all those born after 1960 is 67. You can read more about disability benefits and retirement in our article on the topic.
- You are convicted of a serious crime.
Crimes that result in felony charges and imprisonment can result either in a temporary hold on your benefits or permanent termination of benefits.
If you apply for SSDI, your assets (including your inheritance, income from investments, and your spouse’s income) do not count against your eligibility.
Because an inheritance is not earned income from engaging in SGA, it will not affect your SSDI benefits.
It’s a different story with SSI. Let’s dive into the impact of an inheritance on SSI benefits.
How An Inheritance May Affect Your SSI Benefits
As we said before, SSI is a needs-based program. It is intended for those who are aged, blind, or disabled and have little or no income or resources. Therefore, the primary eligibility factor for SSI is the amount of income and resources an individual has.
For the purposes of SSI, Social Security considers the following as income:
- Money you earn through working
- Money received from the government, worker’s compensation, or family and friends
- Free food or shelter
The monthly income limit for SSI is $841 for individuals and $1,261 for eligible married couples. This is the same as the Federal Benefit Rate (FBR), which is the maximum amount of benefits a recipient can receive per month.
Social Security considers things that you own as resources, including:
- Bank accounts, stocks, and bonds
- Personal property
- Life insurance
- Anything else you own that could be converted into cash and used for food or shelter
If the value of your countable resources exceeds the allowable limit at the beginning of the month in which you’d be receiving SSI benefits, you will not receive your benefits payment.
In 2022, the limit for countable resources is $2,000 for an individual and $3,000 for a couple.
Because the basis for awarding SSI benefits is the amount of income and resources an applicant has, an inheritance would affect SSI benefits. If the value of the inheritance in addition to other countable resources exceeds the above limits, you will no longer be eligible for SSI benefits.
There is a way around this, however.
With the help of a qualified attorney, your inheritance can be put into a special needs trust (SNT).
What is a Special Needs Trust?
We’ll only give a basic idea of what a special needs trust is and how it works in this article. If after reading the information here you decide that you would benefit from a special needs trust, your next step would be to speak with an attorney who can help you.
Let’s define what a trust is first.
A trust is a legal arrangement in which one party (a person or a financial institution) manages another party’s assets. The asset-managing party is called a trustee while the party whose assets are being managed is the beneficiary.
The trust is established by a grantor, the person who creates and funds the trust. In certain types of trusts, the beneficiary is the grantor (i.e., the person who benefits from the trust is also the person who establishes the trust). In other types of trusts, the grantor is someone other than the beneficiary, usually a close family member or legal guardian.
A trustee is typically a person or persons who are entrusted with the best interests of the beneficiary, such as a family member or close friend, a legal professional, or a combination of both.
The trust document explains the terms of the trust, such as the extent of the trustee’s authority, how the trust is supposed to benefit the beneficiary, and rules regarding the termination of the trust.
A special needs trust is a specific type of trust meant to preserve a beneficiary’s eligibility for needs-based government benefits, such as SSI.
To reiterate, it is the trustee, not the beneficiary, who manages the assets in the special needs trust.
This means that the beneficiary does not own any of the assets in the trust, even if the trust was initially funded by the beneficiary. The beneficiary has en-trust-ed (thus, the term “trust”) his or her assets to someone else.
Therefore, this leaves the beneficiary eligible for benefits programs that have limits on income and resources. The trustee generally supplements the beneficiary’s benefits but does not replace them.
Typically, basic expenses cannot be paid for out of a special needs trust. These include items such as food, rent or mortgage payments, or utilities.
The types of costs the SNT can cover are supplemental needs. Examples include costs of childcare, caregivers, and medical equipment and expenses not covered by Medicare or Medicaid.
Types of Special Needs Trusts
There are two types of special needs trusts to be aware of if you have received or expect to soon receive an inheritance.
A first-party SNT (a “self-settled trust” or “(d)(4)(A) trust”) is funded by the beneficiary of the trust with his or her own assets or income. In other words, the beneficiary is the grantor (but he or she is not the trustee).
Funding for a first-party SNT typically comes from an inheritance the beneficiary receives directly. Funding could also come from a personal injury settlement or a gift. After the beneficiary established the trust, he or she would then appoint a trustee to manage it.
For the assets of a first-party SNT not to count against the beneficiary’s eligibility for SSI, federal law requires that the trust be created and funded before the beneficiary is 65 years of age.
The trust must also be irrevocable (i.e. cannot be changed)and provide that Medicaid will be reimbursed upon the beneficiary's death or the trust's termination, whichever happens first.
Finally, the trust must be administered solely for the benefit of the beneficiary. It cannot be used for any other purpose.
A third-party SNT (also called a “supplemental needs trust”) is funded by someone other than the beneficiary, typically a parent or grandparent. For this type of SNT, the funds for the trust cannot belong to the beneficiary. Funds are usually an inheritance from close relatives entrusted to legal guardians, proceeds of life insurance policies, and/or gifts.
This type of trust has no provisions to reimburse Medicaid after the termination of the trust. Instead, whoever created the trust decides (if he or she has not already) how to distribute the trust estate upon the beneficiary’s death.
The type of trust that will be most beneficial to you will depend on your unique situation. Again, nothing in this article constitutes legal advice. Please speak with a qualified attorney if you would like legal counsel or assistance with starting a special needs trust.
Applying for Disability Income? Seek Disability Benefits Assistance.
Before you begin the process to apply for disability benefits, you may benefit from completing a disability case evaluation as a first step.
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By working with one of our experienced legal professionals, you can avoid simple errors on your application that could result in a delayed decision or even a denial. Our accredited representatives support you during every step of the process, and there are zero upfront costs to you.
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Our mission is to help you get approved for the amount of benefits you deserve. If you have any questions, you can always contact us at firstname.lastname@example.org.