Estate Planning for Persons with Special Needs
Do you have an heir or family member that has special needs? Is this person currently or potentially receiving governmental benefits for his or her living expenses and 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 designed to supplement public benefits, not supplant (replace) them. Although there are several different types of special needs trusts, this article will focus on two basic types of trusts: Third-party special needs trusts and First-party special needs trusts.
A third-party special needs trust is one that is funded by someone other than the beneficiary. For example, if a grandparent establishes a revocable trust, and within that revocable trust provides that a special needs trust would be established for a grandchild upon the grandparent’s death, that would be a Third-party special needs trust.
Previously, family members faced a dilemma when it came to their own estate plans and their special needs beneficiary – either the family member disinherited the beneficiary or gave the beneficiary an outright testamentary gift. Disinheritance would normally be the last thing a parent or grandparent would want to do to their special needs beneficiary. Out of all of their beneficiaries, the one they disinherited 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 his or her 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 is referred to in this article as a “special needs trust.” The key element of a special needs trust, and the main requirement to preserve 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 individuals 18 and over 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). To qualify for SSI, the diagnosis must have been made before age 26.
There are both resource and income limits in order to be eligible for SSI. The resource limit for 2023 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 be converted to cash and used for his or her support and maintenance. The items that are excluded under this resource limit are the individual’s personal residence; furniture, clothing, and personal care items; one vehicle; and other specific assets.
Both earned and unearned income is considered when determining the SSI benefit amount. There are several different types of income and they are all treated slightly differently when it comes to SSI. Basically, if the income or other assistance can be converted into food or shelter, then SSI will count it as income and reduce the beneficiary’s monthly SSI payment. In some cases, SSI benefits may be terminated.
Generally, the resources and income of the beneficiary’s parents are “deemed” available to the beneficiary if that beneficiary is unmarried, under 18 and living at home. Income of one spouse will also be deemed available to the other spouse. 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 considered income in the month received. Such distributions will result in a dollar-for-dollar reduction of SSI for any amount over the unearned income limit ($20 per month in 2023);
Reimbursements to the beneficiary for purchases the beneficiary has made, even if the purchases are for exempt assets, will be counted as 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 counted as unearned income;
Payments to a third party for goods or services for the beneficiary unrelated to food 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 or shelter directly to the beneficiary, or purchases them from a third party source, those goods, services or payments will cause a reduction of the SSI benefit, but it will not be the same dollar-for-dollar reduction as with unearned income. The amount of the reduction is based upon a somewhat complicated formula, with maximum amounts determined under a one-third reduction rule or a presumed maximum value rule.
Special needs trusts can be either created during the parent or grandparent’s life (inter vivos) or created upon the parent or grandparent’s 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 provision that distributes, upon their death, a certain percentage or dollar amount of their estate (or the entire estate) to a special needs trust for the benefit of their special needs beneficiary. These terms remain “dormant” until the parent or grandparent dies and then they spring into effect, creating the irrevocable special needs trust at that time. The dormancy of the special needs trust allows great flexibility because the parents and the grandparents can watch the status of the law and/or the beneficiary and his or her needs. If the laws regarding special needs trust change, then the parents and grandparents can amend their Trust or Will to accommodate for those changes. The difference between a Will and a revocable living trust is that a Will is often subject to the court supervision process known as Probate, while a Trust usually is not. The creation of a special needs trust is not limited to parents and grandparents of a special needs person. Any person who wants to provide for a person with special needs in his or her estate plan may create a special needs trust for that special needs individual.
A special needs trust that is established immediately (inter vivos) may be more attractive to those who want to contribute significant amounts of money during their lifetimes to benefit the special needs individual. This may also help consolidate the assets for the beneficiary. These inter vivos special needs trusts can be either revocable or irrevocable, but must provide that the beneficiary cannot revoke the trust or compel distributions. Irrevocable inter vivos special needs trusts provide some assurance to a benefactor that the terms of the trust will not be changed. Another option, if relatively small contributions are anticipated, would be to open a 529 ABLE account. More information about this option can be found in the separate article on ABLE accounts on our website.
A properly drafted special needs trust will protect the entire trust, regardless of size, from being counted as a resource or asset of the beneficiary for purposes of qualifying for SSI, Medi-Cal, and other needs-based benefits.
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. The Trustee should be someone you trust to manage money well (hence the name, “Trustee”.) Equally important is selecting a person who is in tune 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 or a private fiduciary serve in that role, but it will be important to provide detailed information regarding the beneficiary in a letter of instruction. That letter can include information and concerns such as the beneficiary’s likes and dislikes, health needs, medications, routines, idiosyncrasies, etc., in order to provide a more personal connection – and likely a better working relationship – with 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 available for all other needs of the special needs beneficiary. Common uses of trust assets include purchase of a specially equipped vehicle for the beneficiary, concert tickets, plane tickets, dental work that is not covered by the government, etc.
A special needs trust might include a term that allows 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 could 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 beneficiary’s best interest to use the trust funds for better housing.
First party special needs trusts (sometimes referred to as “Litigation” special needs trusts, because the proceeds come from a lawsuit involving the special need individual) are governed by the probate code in regards to how they can be established. A First party or litigation special needs trust is funded with assets that belong to the beneficiary. Distribution and management provisions of these trusts are similar to a third party special needs trust. They are most often funded with litigation proceeds, and are subject to court supervision. This type of trust can also be funded with an inheritance or savings. The biggest difference between first-party special needs trusts and third party special needs trust is the “pay-back” provision. Technically, because the funds belonged to the disabled beneficiary in the first place, Medi-Cal has a right to be repaid for amounts expended by it on behalf of the beneficiary during the beneficiary’s lifetime. There is a specific procedure that must be followed before setting up a first-party special needs trust. It is essential to consult with an attorney before a disabled beneficiary receives settlement proceeds or an inheritance.
Special needs trusts – whether third-party or first-party – are essential planning tools for beneficiaries with special needs, allowing them to enjoy a quality of life beyond the benefits provided by governmental assistance programs. However, due to the complexity of such trusts, and processes involved in establishing and maintaining them, it is important to consult with an experienced attorney before setting one up.
Please contact Senior Attorney Terri L. Easlon at DROBNY LAW OFFICES, INC. if you have any questions regarding special needs trusts.
This testimonial or endorsement does not constitute a guarantee, warranty or prediction regarding the outcome of your legal matter.