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DENNIS A. FORDHAM, Attorney

Board Certified Specialist, Estate Planning, Probate & Trust Law

A. Why Plan Inheritances (gifts) to Persons with Disabilities?
Planning for persons with disabilities who receive “needs based” government benefits is important when considering the possibility that the inheritance (gift) will not meet the beneficiary’s life-time needs (i.e., the money will run out). The following are what is at stake:

  1. Preserving Public Benefits: SSI, Medi-Cal
  2. Enhancing Quality of life: – Basic vs. Special needs
  3. Advocating to preserve rights
  4. Preserving assets for members
  5. Coordinating family giving

B. What may happen if there is no planning?
Failing to plan can result in the following negative consequences:

  1. Ineligibility for Needs Based Benefits;
  2. Overwhelming and straining the beneficiary:
    • Force beneficiary to do lst Party SNT
    • Force Beneficiary to try to reform will
    • Force Beneficiary to spend-down
  3. Allowing assets to be wasted
  4. Allowing Beneficiary to be taken advantage.

C. What are the Planning Options?
The following are different considerations when planning a lifetime or testamentary gift to a “loved one with disabilities” who is receiving “needs-based” government benefits:

  1. Direct gift (bequest) — most usually a poor choice;
  2. Disinheritance — not usually done;
  3. Precatory Gift to family member(s) — may or may not be effective;
  4. Support Trust — does not protect government benefits
  5. Third Party SNT — protects government benefits; and
  6. Third Party Pooled Trust — suitable for some situations

D. What are the Essential Characteristics of Special Needs Trusts?

  1. Beneficiary has no right to receive assets;
  2. All distributions are purely discretionary
  3. Trust has spendthrift clause preventing alienation of assets
  4. Trust expressly provides that distributions may supplement benefits

E. Distinguishing the different types of Special Needs Trusts
There are three types of special needs trusts that are relevant to California residents as follows:

  1. First Party Special Needs Trust
    First party special needs trusts are established when a person with disabilities is the direct beneficiary of an inheritance (where no third party special needs trust has been established) or a court settlement, and would otherwise become ineligible for ‘needs based’ government benefits. It can only be established when the following are met:

    • Person is under age 65 years of age;
    • Person has a significant disability
    • Established by person, parent, grandparent or the court; and
    • Payback provision to reimburse Medi-Cal.
  2. Third Party Special Needs Trust
    Third Party Special Needs Trusts can be established by family members to receive life-time and death gifts (inheritances). They can be established for a person of any age.
    If established by a well spouse for a disabled spouse then they must be established by way of the well spouse’s will. They have the following characteristics:

    • No pay-back provision;
    • Purely discretionary distributions;
  3. Pooled Trusts
    Pooled trusts are administered by non profit organizations. If a family cannot find a qualified trustee or the amount of the inheritance is too small to justify creating a separate trust with all of its administrative costs, then a pooled trust is a definite option and one that can be had on short notice (provided that qualifications are met). A pooled trust has significantly higher costs associated with its administration than a third party special needs trust. But, pooled trusts are expertly managed by persons with qualifications to handle investments and distributions that do not run afoul of public benefits laws. There are different pooled trusts for different types of disabilities because each pooled trust caters to a different kind of beneficiary with respect to which they have particular expertise. Pooled trusts are certainly not for everyone, by any means. There are significant reasons why you may not wish to participate such as:

    1. Administration costs;
    2. Lack of flexibility;
    3. Management style;
    4. Remainder of estate stays with charity.

F. Ways in which Special Needs Trusts can supplement benefits. Special Needs Trust exist to “supplement” but not to replace “needs based” government benefits.
The following supplemental expenditures are permissible from the Special Needs Trust:

  1. Automobile/Van
  2. Accounting services
  3. Acupuncture/Acupressure
  4. Appliances (TV, VCR, DVD player, stereo, microwave, stove, refrigerator, washer/dryer)
  5. Bottled water or water service
  6. Bus pass/public transportation costs
  7. Camera, film, recorder and tapes, development of film
  8. Clothing
  9. Clubs and club dues (record clubs, book clubs, health clubs, service clubs, zoo, advocacy groups, and museums)
  10. Computer hardware, software, programs, and Internet service
  11. Conferences
  12. Courses or classes (academic or recreational) including books and supplies
  13. Curtains, blinds, drapes, and the like
  14. Dental work not covered by Medicaid, including anesthesia
  15. Down payment on home or security deposit on apartment
  16. Dry cleaning and/or laundry services
  17. Elective surgery
  18. Fitness equipment
  19. Funeral expenses
  20. Furniture, home furnishings
  21. Gasoline and/or maintenance for automobile
  22. Haircuts/salon services
  23. Hobby supplies
  24. Holiday decorations, parties, dinner dances, holiday cards
  25. Home alarm and/or monitoring/response system
  26. Home improvements, repairs and maintenance (not covered by Medicaid) including tools to perform home improvements, repairs and maintenance by homeowner
  27. Home purchase (to the extent not covered by benefits)
  28. House cleaning/maid services
  29. Insurance (automobile, home and/or possessions)
  30. Legal fees/advocacy
  31. Linens and towels
  32. Magazine and newspaper subscriptions
  33. Massage
  34. Musical instruments (including lessons and music)
  35. Non-food grocery items (laundry soap, bleach, fabric softener, deodorant, dish soap, hand and body soap, personal hygiene products, paper towels, napkins, Kleenex, toilet paper, and household cleaning products)
  36. Over-the-counter medications (including vitamins and herbs, etc.)
  37. Personal assistance services not covered by Medicaid
  38. Pet and pet’s supplies, veterinary services
  39. Physician specialists if not covered by Medicaid
  40. Private counseling if not covered by Medicaid
  41. Repair services (appliance, automobile, bicycle, household, fitness equipment)
  42. Snow removal/landscaping/gardening (lawn) services
  43. Sporting goods/equipment/uniforms/team pictures
  44. Stationery, stamps, cards, etc.
  45. Storage units
  46. Taxicab
  47. Telephone service and equipment, including cell phone, pager, etc.
  48. Therapy (physical, occupational, speech) not covered by Medicaid
  49. Tickets to concerts or sporting events (for beneficiary and an accompanying companion)
  50. Transportation (automobile, motorcycle, bicycle, moped, gas, bus passes, insurance, vehicle license fees, gas, car repairs)
  51. Utility bills (Direct TV, cable, TV, telephone—not gas, water or electric)
  52. Vacation (including paying for a personal assistant to accompany the beneficiary)

G. Memorandum of Instructions to Trustee.
Typically the family member who is establishing the special needs’ trust is also the primary advocate and care coordinator of the persons with disabilities. When that care giver dies there will be a large hole to fill in terms of continuing to care for the person with disabilities. For this reason, It is very important to write a letter of instruction from yourself to the Trustee to advise them of the following particulars:

  • Benefit programs:
    Tell the Trustee what programs the beneficiary currently receives benefits from and whom to contact.
  • Health needs:
    Advise the trustee about the medical condition and medical needs of your loved one.
  • Persons to contact:
    Provide names and contact information for important persons to contact, such as the case worker, the doctor and interested family members.
  • Living arrangements:
    Explain what the living arrangements are and how they may change once you pass on.
  • Programs & Services:
    Detail the programs and services and how they help the beneficiary.
  • Daily Activities of the PWD:
    Describe what a typical week is like in the life of the person with disability.
  • Describe PWD abilities:
    Describe what the person is able to do so that they can live life as fully as possible.

H. The Role of The Trust Protector.
A trust protector is an important consideration when drafting a special needs trust for various reasons. First, if it becomes necessary to replace the trustee, the trust protector has the authority to hire and to fire trustees. This ensures that trustees are sensitive to your wishes as expressed in your memorandum of instructions.

Second, if the public benefits law changes in a way that requires the special needs trust to be amended, the Trust Protector can bring a court action to change the trust itself.

Dennis A. Fordham, Esq. is a State Bar Certified Specialist in Estate Planning, Probate & Trust Law. His Practice is located at 55 First Street, Lakeport, CA 95453 (707) 263-3235. His informative website is: www.DennisFordhamLaw.com.

This article does not substitute for legal advice.

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