With regard to the distribution of assets upon death, comprehensive estate planning should focus on three key areas: (1) Who should inherit? (2) What should they inherit? And (3) How should they inherit? Most time and energy are spent focusing on the first two elements. However, the third element should not be overlooked as it might be the most important. The manner in which an inheritance is structured can take advantage of key planning opportunities including protecting an inheritance from creditors, predators, and divorce. In the case of a Special Needs beneficiary, the careful structure of an inheritance will ensure the preservation of crucial government benefits.
Many public benefits such as Medi-Cal and SSI are “means-tested”: an individual is only entitled to such benefits if his/her estate is below a certain asset threshold. It often requires the navigation of nuanced rules and bureaucracy for an individual qualify for such benefits. Once an individual has qualified for such benefits, keeping such benefits is critical. The receipt of an inheritance could place an individual who has means-tested public benefits in jeopardy of suddenly becoming ineligible for continuing to receive those benefits. The most common solution to this problem is a Special Needs Trust.
If a Trust-Maker knows that a beneficiary is receiving means-test public benefits, a comprehensive trust will provide for a Special Needs Trust: a specific type of trust that allows the beneficiary to benefit from the inheritance in a manner that does not jeopardize eligibility for public benefits. Some of the key requirements of a Special Needs Trust are: (1) a third party other than the beneficiary must serve as trustee; (2) the beneficiary must not be able to revoke or modify the trust directly; and (3) the trustee must be careful in making trust distributions for purposes that are supposed to be covered by the public benefits.
A Special Needs Trust can work very well in order to achieve the dual goals of providing a beneficiary with an inheritance while also preserving the beneficiary’s eligibility to receive means-tested public benefits. However, traditional Special Needs Trusts only work if the Trust-Maker knows that the beneficiary is receiving means-tested public benefits at the time the trust is created. Circumstances can change and the Trust-Maker might not always have an opportunity to amend the trust in the future to account for such changes. Having a standby Special Needs Trust in the “back-pocket” can resolve this problem.
If at the time of creating a trust, the Trust-Maker is not aware that any beneficiary is receiving means-tested public benefits, the inheritances can be structured without Special Needs Trust provisions. However, a dedicated section of the trust can provide that if at the time a distribution from the trust is about to be made in the future – after the Trust-Maker has died – any beneficiary is receiving means-tested public benefits, the trustee is instructed to distribute that beneficiary’s share to a Special Needs Trust. The terms of the standby Special Needs Trust can be included in the dedicated section and will only be triggered if and when needed.
Although it is impossible to predict all possible scenarios in the future, the possibility that a beneficiary might need means-tested public benefits in the future is foreseeable. Including a standby Special Needs Trust in the “back-pocket” is a reasonable measure to ensure that the beneficiary’s inheritance will not become a burden.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California 93950 and Kyle may be reached at 831-920-0205,
Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before acting on any of the information contained within this article, you should consult a competent attorney who is licensed to practice law in your community.