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ESTATE PLANNING FOR PERSONS WITH SPECIAL NEEDS

Do you have an heir or family member that has special needs? Is this heir currently or potentially will be receiving governmental benefits for their medical needs? This article will address how to provide for them in your estate plan.

The estate planning device that allows an individual to continue to receive governmental assistance when they either inherit assets or when they receive assets through litigation, is a special needs trust. Basically, a special needs trust is a discretionary trust designed to preserve governmental benefits for a disabled or aged beneficiary. Distributions from the special needs trust are supposed to supplement public benefits, not supplant them. There are a few different types of special needs trusts. However, we will concentrate on the third-party special needs trust and briefly touch on litigation special needs trust.

A third-party special needs trust is one that is funded by a person other than the beneficiary. For example, if a grandparent established a revocable trust and within that revocable trust provided that a special needs trust would be established for their grandchild upon the grandparent’s death, that is a third-party special needs trust.

It used to be that family members had a dilemma when it came to their own estate plans and their special needs beneficiary - either the family member disinherited the beneficiary or gave them an outright testamentary gift. Disinheritance was the last thing that a parent or grandparent would want to do to their special needs beneficiary. Out of all of their beneficiaries, the one they disinherit was probably the one that needed the funds the most. But, if they gave the beneficiary an outright testamentary gift and that gift exceeded the applicable resource limit, then the beneficiary would lose their Supplemental Security Income (“SSI”) and Medi-Cal.

The idea of supplemental trusts began in the mid 1970's and California was the leading state in developing today’s “special needs trusts.” Throughout the United States the terms “supplemental needs trust,” “supplemental trust,” and “special needs trusts” are used to describe the same type of trust, which we refer to in this article as a “special needs trust.” The key concept with a special needs trust, and what is required in order for it to not affect the beneficiary’s SSI and Medi-Cal benefits, is that the beneficiary has no power to revoke the trust or to direct the use of the trust assets for his or her own support and maintenance.

It is important to understand how SSI and Medi-Cal work in relation to special needs trusts. SSI is the federal assistance program that provides a guaranteed income to persons who are age 65 and older and persons who are blind or disabled. A person is disabled if they are “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.” 42 USC §1382c(a)(3)(A).

There both resource and income limits in order to be eligible for SSI. The resource limit for 2006 is $2,000. A qualified SSI beneficiary cannot have over $2,000 in cash or other liquid assets or any real or personal property that he or she owns that could convert to cash and use that cash for support and maintenance. The items that are excluded under this resource limit are the individual’s personal residence; furniture, clothing, and personal care items; vehicle if used for employment or medical treatment; and other specific assets.

Both earned and unearned income is considered when determining the income limit. There are several different types of income and they are all treated slightly differently when it comes to SSI. Basically, if the income can be converted into food, clothing or shelter, then SSI will count it as income and either reduce the beneficiary’s monthly SSI payment or the entire loss of SSI.

One point for individuals to know is that generally the resources and income of the beneficiary’s parents are “deemed” available to the beneficiary if that beneficiary is unmarried and under 18 and living at home. This is also true of spouses. Deeming can have a significant impact on whether the beneficiary qualifies for SSI.

SSI is very important because if an individual qualifies for SSI, then he or she will automatically qualify for various other government benefit programs - such as Medi-Cal. Medi-Cal is the California Medicaid program. It provides payment for hospitalization, treatment in medical clinics, doctors’ services, lab tests, X-rays, home health care, nursing home care, and other related medical services. It also pays for community mental health and drug abuse services and intermediate care facilities for the developmentally disabled.

As mentioned above, the key factor in whether the assets in a trust will be considered resources or whether distributions from a trust will be considered income with respect to SSI, is the beneficiary’s powers over the trust - whether the beneficiary can revoke the trust or direct the use of the trust assets for his or her support and maintenance.

Here are some examples of how certain distributions from a trust will be treated when it comes to income:

• Distributions of cash to the beneficiary will be income in the month received. Such distributions will result in the dollar-for-dollar reduction of SSI in excess of the unearned income limit ($20 per month in 2006);
• Reimbursements to the beneficiary for purchases the beneficiary has made, even if the purchases are for exempt assets, will be counted as ordinary income;
• Unearned income is not limited to cash distributions. Distribution to the beneficiary of any item that the beneficiary may convert to cash may be unearned income;
• Payments to a third party for goods or services for the beneficiary unrelated to food, clothing or shelter are not considered income. Consequently, the trustee may purchase a plane ticket for the beneficiary without any impact on SSI;
• If the trustee provides goods or services relating to food, clothing or shelter directly to the beneficiary, or purchases them from a third party source, such goods, services or payments will cause a reduction of the SSI benefit but not dollar-for-dollar as with unearned income. The amount of the reduction is limited to certain maximums determined under either the one-third reduction rule or PMV rule.

Special needs trusts can be either created during the parent or grandparents life (inter vivos) or created upon the parent or grandparents death (testamentary). The most common are the testamentary special needs trusts. An individual can execute either a Will or a revocable living trust which contains a distribution provision that provides for a certain percentage or dollar amount of their estate or that their entire estate goes to a special needs trust for the benefit of their special needs child or grandchild. These terms remain “dormant” until the parent or grandparent dies and then they spring into effect and the irrevocable special needs trust is created at that time. The dormancy of the special needs trust allows great flexibility in that the parents and the grandparents can watch the status of the law and/or the beneficiary and their needs. If the laws regarding special needs trust change, then the parents and grandparents can go and amend their revocable living trust to accommodate for those changes. The difference between the Will and the revocable living trust depends on the parents and grandparents exposure to probate.

A special needs trust that is established immediately is more attractive to parents and grandparents who want to contribute money before they are deceased. They also help consolidate the assets for the beneficiary. These inter vivos special needs trusts can be either revocable or irrevocable, just so long as the beneficiary cannot revoke the trust. Typically irrevocable inter vivos special needs trusts provide some assurance that the terms of the trust will not be changed by the person holding the power to revoke.

An important consideration for a special needs trust is who is going to serve as trustee? Who will be the individual or entity that manages the trust assets for the beneficiary? The trustee should never be the beneficiary or the beneficiary’s spouse because of the control and the deeming factors. You obviously want someone who is good with money, but you also want someone who is in tuned with the needs of the beneficiary. Sometimes it is advisable to name co-trustees - one trustee can be a financial institution and the other could be a family member. If you do not have a family member that can act as trustee, you can still have a financial institution, but give detailed information regarding the beneficiary in a letter of instruction. You can inform the person or persons of the beneficiary’s favorite color, favorite food, likes and dislikes, medications, etc. in that letter so that they will have a more personal connection to the beneficiary.

As long as the special needs trust has terms detailing that no assets of the trust are to be used for things that the governmental benefits pay for and the trustee follows those provisions, then the trust assets are there for all those other needs of the disabled child or grandchild. Common uses of trust assets are to purchase a specially equipped vehicle for the beneficiary, concert tickets, plane tickets, dental work that is not covered by the government, etc.

Other common terms for a special needs trust include allowing the trustee to make payments that could possibly disqualify the beneficiary from governmental benefits if the trustee decides it is in the best interest of the beneficiary. For example, the trustee may use trust funds to purchase a house on behalf of the beneficiary. This would cause a reduction in the beneficiary’s SSI stipend because it is a “shelter” expenditure. However, if the beneficiary has housing needs that exceed the government benefits, it is in the beneficiaries best interest to use the trust funds for better housing.

Litigation special needs trust are somewhat governed by the probate code in regards to how they can be established. They have similar terms to a third party special needs trust, are funded with litigation proceeds, and usually subject to court supervision. However, these types of SNTs can also be funded with an inheritance or savings. The biggest difference between litigation special needs trusts and third party SNTs is the “pay-back” provision. Technically because the funds were the disabled beneficiaries in the first place, Medi-Cal has a right to be repaid what they expended for the beneficiary during the beneficiaries lifetime. There is a procedure that must be followed before setting up a litigation SNT making it very important to discuss with an attorney if a disabled beneficiary is going to receive settlement proceeds or an inheritance.

Special needs trust - whether third-party or litigation - are wonderful tools available for beneficiaries with special needs to have available funds for those needs beyond what governmental assistance provides for. However, due to the complexity of the required language of an SNT, it is important to discuss with an attorney before setting one up.

Please contact Drobny Law Offices, Inc. if you have any questions regarding special needs trusts.

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