Special Needs Trusts for California Residents
It happens all too often. The government provides benefits to
disabled or ill people but if the ill or disabled people inherit some
money from their parents, suddenly the benefits stop until the
inheritance is depleted by the disabled child. What took a life time of
saving by parents hoping to help their children is wiped out in a few
months. As one brother told me about what happened in his family, he saw
the share from his parents’ estate allocated to his brother wiped
out in three months by medical bills that the government normally paid.
For disabled or injured people, there are often various Federal or
State programs that can help defray medical or living expenses. A problem
often encountered, however, is that many such programs require that
assets owed by the recipient be below a
receive no further benefits.
After spending his inheritance, perhaps within just a few months,
the child will have no assets, and great difficulty in returning to the
SSI and Medi-Cal programs. Further, the assets would have been wasted
either by inappropriate spending or by paying for things that otherwise
SSI and Medi-Cal would have paid for. It is not only a total waste of his
inheritance, but likely to interfere with his future well being since he
may not be able to easily return to the benefit programs. The sad fact is
that the parents actually hurt him by bequeathing him that money!
The solution is The Special
Needs Trust. Instead of
leaving assets directly to the disabled adult child, the parents could
establish a special needs trust in their living trust or wills. This trust would not be under the
control of the child, and the child would not be able to revoke it and
use the assets for his own purposes.
The trust would have an independent trustee and would continue for
the lifetime of the child. The trust could own various assets that are
used by the child, but due to the ownership by the trust, the assets are
not counted as being owned by the child.
The trust could also pay for services required by the beneficiary,
such as telephone, education, medical care that is not provided by
Medi-Cal, special training, etc. without affecting the beneficiary's
eligibility for the government programs.
The trustee, however, would not make cash payments to the child
because the payments would be counted as income for the beneficiary and
could result in reduction or loss of benefits. The trust could even own a
home for the child, thereby reducing the child's expenses for rent,
although there may be some reduction in SSI benefits as a result.
This type of trust, has no obligation to notify the state or pay
back Medi-Cal payments after the
beneficiary's death. It prevents
the beneficiary from controlling the assets, but also maintains a means
of helping the beneficiary through the assets held by the trust.
A problem that can be confronted is if the beneficiary regains
health. The trust must be irrevocable upon the parents’ death to
avoid the claims of the government that their payments should be reduced.
If the beneficiary can demand access to the assets, the government will
claim that the trust must be counted among the beneficiary’s
assets. Thus the rigidity of the trust, required to achieve its purpose,
may put the principal of the trust beyond the beneficiary’s reach
even if he or she becomes fully healthy again.
Nevertheless, many of our clients have carefully considered the
benefits of protecting their children or grandchildren in this manner and
have elected to create these safeguards. Close consultation with legal counsel
and the family accountant makes sense before creating this type of
arrangement. As one of our clients commented sadly, “Giving my son
this money would be like giving Vodka to an alcoholic. I am careful to
protect him while I am alive. Now I must make sure I can protect him even
when I have passed on. It’s the last favor I can do for him.”