|
Special Needs Trusts for California Residents
INTRODUCTION:
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 certain level. This can often
eliminate much needed outside assistance and, if an inheritance comes in
at the wrong moment, that inheritance can actually be entirely depleted
by the requirements of the outside agency.
It is, however, possible to leave a bequest to an individual and
not have that bequest necessarily disqualify him or her for such
benefits. Such trusts are call SPECIAL NEEDS TRUSTS and are briefly discussed
in this article.
SPECIAL NEEDS TRUSTS
The primary purpose of a Special Needs Trust is to preserve
government benefits for disabled beneficiaries. At times, it can also protect other
sources of benefits. Usually the benefits involved are from programs that
have limits on the beneficiary's assets and income. Receipt of an inheritance outright can
disqualify the beneficiary for future government benefits.
Typical examples:
Government Programs: Two of
the programs that are based on financial need are Supplemental Security
Income (SSI) and Medi-Cal, which is the California version of the Medicaid program.
Housing subsidies, also called the Section 8 program, In Home
Support Services, food stamps, and utility payment assistance are also based
on financial need. Note, however
that Social Security and Medicare are not based on financial need, but
are instead based on the applicant's age and earnings record.
Let’s take a typical example of a situation in which a
Special Needs Trust would be appropriate:
Suppose a couple has four adult children who will divide a $800,000
estate after both parents have died.
One of the children is receiving SSI benefits due to a previous
disabling accident which made him mentally disabled and he now has
difficulty handling money. Because
he is receiving SSI benefits, the child is also eligible for Medi-Cal
benefits for his continuing medical and mental problems. This child is wisely not given large
amounts of money by his parents while they are alive because he is likely
to waste anything he is given. If
the couple sets up a traditional distribution plan in their wills or
trust that gives everything to their children equally, their disabled
child is likely to have major financial problems.
If the child outlives his parents, he will inherit approximately
$200,000, which will increase his assets far above the limits set by the
SSI program and by the Medi-Cal program.
The child will be disqualified from those programs and will
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.”
|
