My friend inherited a $160,000 house. Will this put her Social Security disability income at risk? What can she do?

By Alessandra Malito

'She really needs the money to make improvements to her house'

Dear Help Me Retire,

A friend's parents died with wills stating everything goes equally to both adult children, they are co-executors. A house is the only asset, so that will be split 50/50.

Their daughter has been on Social Security Disability Income for 30-plus years, and also receives about $200 a month from Supplemental Security Income. Total income is about $1,000 a month. She has been buying a house on land contract for the past seven to eight years.

The inherited house will sell for approximately $160,000, divided between the two heirs. She really needs the money to make improvements to her house (roof, insulation, kitchen floor, bathroom). These are not pretty enhancements, but necessities. The big issue is the inheritance will eliminate her SSI, and reduce her SSDI. It's a no-win situation.

Her attorney's advice was to find a way to get the inheritance into someone else's name. Big help! She doesn't have money to spend to get advice from several lawyers. Her brother is willing to give her more than her 50%, but he lives in another state, so they can't see an attorney together.

Risky Inheritance

Related: 'It bothers me that it's frozen': I'm 64 and can't get my pension until I retire. Is this common?

Dear Risky,

Disability benefits can be very complicated. Adding in an unexpected or large sum of money can be life-changing and helpful, but it could also put those disability benefits at risk.

This woman's Social Security Disability Income, or SSDI, should not be impacted by any money she gets from selling an inherited house. SSDI is not based on financial need, it's based on work history.

SSI, on the other hand, is need-based, and the proceeds from the sale could be counted as income and work against her. SSI beneficiaries must keep their assets below a certain limit, and if the money she gets from the sale of the house is kept as is, it would probably put her over the limit.

"Once that home is sold, that is considered income and would impact the eligibility for SSI," said Michael Davis, a certified financial planner at Legs Financial. "You must report the inheritance to the Social Security Administration within 10 days of receiving it. Failure to report can lead to penalties and even allegations of fraud."

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Your friend has some options to look into that could protect her benefits but allow her to receive this inheritance.

One common option is a special-needs trust, said Clark Randall, a certified financial planner and director of financial planning at Creekmur Wealth Advisors. This may not be necessary for someone receiving SSI alone, given that those benefits are not always linked to a disability, but since this woman is receiving SSDI, it could be a possibility.

There are many different types of special-needs trusts, as well as specific language that should be used and may change depending on state rules, so an estate attorney or planner should assist in creating the trust.

She may be better off finding an attorney who is highly familiar with the rules and regulations of trust creation. "There are many nuances to setting it up correctly to make sure the disabled person doesn't lose their benefits," said Tricia Rosen, a certified financial planner and founder of Access Financial Planning.

ABLE account

There are a lot of variables. For example, the disabled beneficiary is better off not receiving the inheritance directly - in an effort to protect her SSI benefits - but it may not be possible to divert that since both parents died and named her as a beneficiary, Rosen said.

It sounds like her brother is willing to help. If their relationship really is strong - and she is sure that she can trust him - this woman could consider disclaiming her half of the inheritance so it goes solely to her brother. He could create an ABLE account or a supplemental needs trust that is funded with her half of the inheritance.

ABLE accounts allow people with disabilities to save for expenses that pertain to that disability, but in order to qualify for that type of account the beneficiary must be disabled by a condition that began before his or her 26th birthday (or blind). The beneficiary must also receive SSDI or SSI that is based on the disability or blindness.

Another avenue would be to pay off debt or invest in assets that are exempt from what SSI counts toward resource limits, said Melissa Caro, a certified financial planner and founder of the newsletter My Retirement Network.

Resource-limit exceptions include a person's primary residence and the land it's built on, one vehicle per household, most personal belongings and household goods and property that can't be used or sold, according to the Social Security Administration.

These may not be quick, simple fixes, but they can help her do both - keep her benefits intact and receive that inheritance that will improve her comfort at home.

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Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com

-Alessandra Malito

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10-05-24 0630ET

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