The ABC’s of Estate Planning by Attorney Gerald Cummings ~ Part 3 of 5
I have worked with many parents with disabled children over the years. A common concern among all of them is how to provide for their disabled child after they have died. When that child becomes an adult, he or she will often be able to qualify for Supplemental Security Income (“SSI”) and Medi-Cal. These are two needs based governmental programs. If the disabled child receives an inheritance outright, he or she will lose his or her governmental benefits. This will pose an extreme hardship to that child. Fortunately, there is a way to prevent this from happening by making sure that any distribution to a disabled child is made to a special needs trust (“SNT”) rather than to the child outright and, if this cannot be done, there are ways to still place the inheritance into an SNT.
What is a special needs trust?
A SNT is a trust that is setup and designed to hold assets for a disabled beneficiary while still allowing that beneficiary to qualify for needs based governmental benefits, such as SSI and Medi-Cal. The trust will have specific restrictions that prevent the disabled beneficiary from exercising control over the SNT and prevent the trustee from spending trust assets on things that a government benefits program may cover and that prevent the trustee from giving any money to the disabled beneficiary outright. The money being held in the SNT can then be spent for the benefit of the disabled child without jeopardizing his or her eligibility for SSI and Medi-Cal. There are two types of special needs trusts: Third person SNTs and first person SNTs.
Third person special needs trust
A third person SNT is a special needs trust that is setup by a third party for the benefit of a disabled child, typically by the child’s parents. The parents specify that, upon their deaths, some money will go into a SNT for the benefit of their disabled child. The child never receives the money outright. Upon the disabled child’s death, any assets remaining in the SNT will either go to those people designated by the trust creators when the trust was first created or to those people the disabled person may have appointed to receive the remainder in his or her will. There is no need to repay any governmental agency for benefits paid with this type of SNT.
First person special needs trust
A first person SNT is setup for the benefit of a disabled person after the disabled person receives money. Usually, this money is the result of a lawsuit or an unexpected inheritance. By following guidelines put in place by the Federal government, it is possible, in most cases, to place the money received into a SNT and still maintain the disabled person’s eligibility for governmental assistance. One big difference between this type of SNT and a third person SNT is that there has to be a repayment provision requiring the repayment to the state that provided them any benefits paid out under Medi-Cal and/or Medicaid for the disabled person. This field is very complex and correct legal advice is important.
In addition to ensuring that their estate planning documents are properly drafted, the parents of a disabled child will also need to consider who will make decisions for that disabled child when he or she becomes an adult. Often, the parents will seek to be appointed limited conservators over their disabled child and this will be the subject of my next article. If you have any questions about this article or any of the topics discussed, please feel free to call me at (408) 286-2122.
Gerald W. Cummings is an estate planning attorney in San Jose, California. He works with families to help them achieve peace of mind, the peace of mind that is obtained by putting their wishes down in their wills, trusts, and other estate planning documents. He can be found on the web at www.cummingslegal.com.