Received an Inheritance or Lawsuit Money?

How to Make it Work for You or Your Loved One

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You have just received a large inheritance or a settlement from a lawsuit. You also have a disability that requires access to federal and state needs-based assistance programs. We all know how hard it can be to access those programs. The last thing you want to jeopardize is your access to medical care or income programs (SSI) just because you inherited a large sum of money or received a legal settlement. We at East Bay Probate & Trust Administration can provide guidance, support and draft the legal documents necessary to preserve your money and still maintain your government benefits.

First some background information. Not all government programs are affected by your windfall of money. Persons with disabilities need only concern themselves with needs based programs such as SSI, Medi-Cal or Section 8. If the only government benefits involved are entitlement programs like SSDI or Medicare, that have no resource limit, then a special needs trust may be unnecessary. Our goal at East Bay Probate is to preserve your needs based public benefits while using your newly acquired money to provide supplemental lifetime financial and medical support by purchasing items that make your life more rewarding.

If you desire to create a special needs trust, the person who inherits the money or receives lawsuit proceeds may set up such a trust. While it used to be that a parent, grandparent, legal guardian or the court were required to set up a First Party Special Needs Trust (SNT), California law has changed allowing the beneficiary to set up his or her own SNT. This type of trust is also called a (d)(4)(C) SNT (named for the statute that created SNT’s). This may be the best option for someone who receives an inheritance or lawsuit monies and wants to preserve their right to benefits. Some practitioner’s call SNT’s “payback trust” because of the provision that when the beneficiary dies, the SNT must pay back the state what is owed to Medi-Cal for the services provided during the decedent’s life. This will preserve the beneficiary’s access to needs-based programs as well as provide supplemental support from SNT disbursements.

The key points that SNT’s are required to have are:

1. they must be established by an authorized person or entity (and recently, the rules were changed to allow the disabled beneficiary to set up his or her own SNT);
2. the SNT must be for a person under 65;
3. the SNT must be for the sole benefit of the beneficiary;
4. the beneficiary must have a disability;
5. the SNT must be irrevocable;
6. Medi-Care must be repaid for the services it provided;
7. No entity may benefit from the SNT, other than Medi-Care.
8. Require the trustee to give notice to all state agencies when the beneficiary dies, or the SNT terminates or there is a change of trustees.

Now lets look at where the money in the SNT may be spent. The rules state that a SNT beneficiary can have 1) principal residence of any value 2) one automobile of any value 3) household items or personal effects of any value that are personal property found in or near the home and may be used on a regular basis. These rules can be quite flexible. We had a client in a long-term care facility, and she was able to buy a house with her SNT money even though she was living in a long-term care home. She just has to designate the home she bought as her primary residence even though she never planned to reside in the home. However, she had to tell Medi-Cal that she intended to return to her newly purchased home.

However, for some people, there is another way to avoid the cost of establishing and administering a SNT. One can spend-down their inherited/lawsuit money and avoid the need for a SNT, leaving themselves with only $2,000.00 to their name. SSI and Medi-Cal allow the beneficiary to have no more than $2,000.00. Thus, one can avoid the need to set up a SNT by spending down his or her inheritance/lawsuit monies and leaving themselves with only $2,000.00 in assets. But this spend-down must be done carefully.

For example, SSI allows for the prepayment of food and shelter or services by the beneficiary as long as it is being paid at the fair market value. For example, if you received an inheritance of $50,000.00 and you paid it to a family member to provide you with room and board for 10 years, as long as the claims representative from Medi-Cal confirms that $50,000.00 is the fair market value for 10 years of food and shelter, it would be allowed as a proper way to reduce the beneficiary’s net worth. Thus, the beneficiary has just removed $50,000.00 from his assets, his food and shelter are paid for the next 10 years and the beneficiary still has access to Medi-Cal and SSI. However, the beneficiary must do their spend-down very carefully or else they might unwittingly run afoul of Medi-Cal guidelines and end up losing some of their government benefits. We at East Bay Probate can help you navigate how to spend down your money without jeopardizing your SSI or Medi-Cal benefits.

A beneficiary can also set up an ABLE account. A maximum of $14,000 per year from all sources may be contributed to the ABLE account annually with the account holding no more than $100,000.00. Money in an ABLE account can be used for education, housing, clothing, health, and other allowed categories. ABLE accounts are not a replacement for a SNT because of their limitations, but can be useful when established in conjunction with a SNT. Beware however, the ABLE account is subject to reimbursement to the State for Medi-Cal expenses.

Another concern is if a beneficiary is the recipient of money from a trust, for example, from their deceased parent’s trust. If their parent’s trust does not incorporate a SNT within it, and it requires the trustee to distribute the parent’s money to the beneficiary or the parent’s trust contains instructions to provide “support” or “maintenance” to the beneficiary, these could jeopardize the beneficiary’s needs-based public benefits. An option under this circumstance is to petition the court to modify (or reform) the parent’s trust to create a SNT for the beneficiary.

In drafting the SNT, we work with our clients to find the appropriate person to be the trustee, educating the trustee about permissible and prudent SNT disbursements that can be made, and educating all parties on public benefits issues as they apply to SNT’s administration. This begs the question, who should be the trustee?

It all depends on the amount of money and property in the trust. Given the potential complexities of managing a SNT, the tasks and responsibilities are many. Maintaining the books, keeping abreast of all the demands and requirements of the various government agencies as well as the IRS, getting along with the beneficiary and his or her family, having a keen eye to analyze the services being provided to the beneficiary and last but not least, having lots of time and patience are some of the responsibilities of a SNT trustee. It is sometimes best to put together a management team such as a private fiduciary serving as trustee with a trust advisory committee made up of family and friends and care givers. However, such as system is costly. It’s also challenging. We have learned of financial institutions that have trust departments that refuse now to handle SNTs. It can be challenging.

For those SNT’s funded with less than $300,000.00, a family member serving as sole trustee is the only option because it will be difficult to find a professional as many professional trustee’s base their compensation on the value of the trust assets or if they charge by the hour, their hourly rate will consume a large portion of the trust estate.

A trustee of a SNT must have not only the usual trustee skills but must assume additional duties not normally handled in other trusts. For example:

1. A SNT trustee must be able to understand how any distributions from a SNT interact with public benefits.
2. If a SNT trustee is responsible for taking care of the beneficiary’s personal needs, the trustee will need to understand the beneficiary’s disability, his or her living situation, and public benefits being received.
3. The SNT trustee may need to make sure that the beneficiary is receiving all the public benefits that the beneficiary is entitled.
4. A SNT trustee should be aware of his or her language when speaking with or about a person with a disability. For example, try not to use language that labels the beneficiary as disabled but someone with a disability.
5. A SNT trustee might do well to learn about community support organizations.

A SNT trustee has a fiduciary relationship with the beneficiary of the trust. The trustee is required to exercise and have the duty of skill and care as a trustee, the duty to carry out the terms of the trust, a duty of loyalty to the beneficiary, perhaps investment duties, a duty to maintain books and records and duty to account to the beneficiary and perhaps the court.

Sometimes it’s wise for a Trust Advisory Committee (TAC) to be formed of family members and friends of the beneficiary or the parents. The TAC can provide guidance and provide helpful support to the trustee. However, the trustee must make sure whether the trust instrument requires the trustee to consult with the TAC before making any decisions. We at East Bay Probate usually suggest that the TAC act in an advisory capacity only, not for the TAC to control distributions.

Sometimes a SNT will have a Trust Protector, who is a person that is usually empowered with the power to remove a poorly functioning trustee or to amend the SNT to keep it current with changing laws.

One of the challenges facing a trustee of a SNT is the making of distributions. The trustee must perform a balancing act between providing for the beneficiary without violating the income and resource rules of SSI or Medi-Cal. Also, the trustee must do whatever he or she can to make sure the money in the trust lasts as long as possible. In making distributions, the trustee must always act in good faith. If there is a question of the trustee’s good faith, rest assured that there is a legal presumption that he or she has acted in good faith.

There are many details to consider when distributing funds from a SNT. For example, one can buy a home for the SNT beneficiary and the money used to buy the home will be considered income for the month it was used to buy the home. The SNT beneficiary will loose his or her SSI income for that month. However, the following month the SSI income will resume because the home is an exempt resource. How the money from the SNT is distributed and used is crucial.

Any money the SNT trustee gives the beneficiary will be considered direct income under SSI rules. So the SNT trustee must be careful not to distribute cash directly to the beneficiary but make payments for goods and services directly to the vendor. Gift cards should not be given to the beneficiary (Medi-Cal has no prohibition on gift cards). The trustee can make payments directly for certain medical care like message therapy or for social occasions like outings, entertainment, etc… It is safe for the trustee to provide noncash items directly to the beneficiary (other than food and shelter), such as kitchen utensils, bed linens, dishes, household supplies, books, furniture, computers, recreational equipment or a television and cable and cell phone service.

Be forewarned, however, that providing certain household operating expenses will be counted by the Social Security Administration as “in-kind support and maintenance” and will reduce the beneficiary’s SSI benefits. Examples of expenses considered operating expenses (and thus used to reduce the SSI benefits) include: Mortgage payments, rent, property taxes, gas, electricity, water, sewage, and garbage collection.

Now a bit about taxes. If taxes are to be paid on the trust proceeds, the grantor is required to pay the income tax. This is a good. Why? Because if a trust itself pays income tax, the trust reaches the highest tax bracket for federal taxes ie., 39.6% at only $12,500 of taxable income whereas an individual taxpayer would have to earn more than $418,400 to be taxed at the same tax rate (as of 2017).

How to terminate a SNT? The two most common reasons for termination are the death of the beneficiary or the exhaustion of the trust assets. First and foremost, once the trust terminates, the SNT must payback Medi-Cal, then payment of creditors of the SNT. The trustee must notify the public agencies like the Department of Health Care Services, the Department of Developmental Services, and the Department of State Hospitals as well as any other governmental departments that provided medical assistance to the SNT beneficiary, including agencies in other states. SSI and the Social Security Administration do not require payback for SSI payments. If there are funds remaining in the SNT after all government agencies and creditors have been paid, the remainder identified by the beneficiary should be distributed according to the trust document.

East Bay Probate & Trust Administration help you create the SNT that will withstand the scrutiny of government agencies. Just as importantly, we also educate and train trustees on how to administer, hold and distribute the funds contained therein. It’s a long process from the time our client first walks into our office until the trust document is created, the trust is funded and the trustee is educated. However, working together, we can make your newly acquired money serve you for many years to come without impacting your government benefits.