HOW DOES INHERITANCE AFFECT MY "MEANS TESTED" SUPPLEMENTAL SECURITY INCOME (SSI) BENEFITS AND/OR MY "MEANS TESTED" MEDI-CAL BENEFITS?

William Sweeney

Often, ill-informed parents, grandparents, siblings, and other friends and relatives cause their special needs loved ones to lose "means tested" government assistance programs by leaving them unprotected inheritances. This is particularly true if that person with special needs relies on Supplemental Security Income ("SSI") for daily expenses. SSI is a "means tested" federal benefits program that provides money to meet basic needs for disabled, elderly and blind people who have little or no income.

In addition, the person with special needs may lose Medi-Cal eligibility. Medi-Cal is a needs-based, "means-tested" Entitlement Program. Medi-Cal is California's version of the Federal Medicaid Program. A portion of our California income taxes and our Federal income taxes have been funding the Medicaid/Medi-Cal Program since 1966. Medi-Cal has a two component benefit. The "Medical" Benefit, which acts as a health insurance benefit and the "Long Term Care" entitlement that covers medical expenses but also helps with Skilled Nursing Facility expenses and Hospice in most cases.

Receiving an inheritance may impact eligibility for either or both SSI and Medi-Cal benefits. Because of this fear some have prepared estate plans to exclude the special needs loved one. For example, some often leave a share of their estate to a relative of the special needs loved one or a third person, with the promise from the relative or third person that he or she will take care of the needs of the special needs loved one. Major mistake! While the relative or third person may have every intention of honoring the promise, many unforeseen circumstances can arise and prevent this from happening.

For example, the relative or third person may be forced into bankruptcy or get into trouble with the IRS. Also, the assets can be seized by a creditor of the relative or third person if a creditor enforces a judgment and seeks to have the funds set aside. Commonly, the relative or third person may be involved in a nasty divorce. Ouch, the family court dissipates the funds as part of the dissolution agreement. What happens if the relative or third person becomes disabled or passes away, leaving the money in the hands of someone who may be unaware of the arrangement or not feel honor-bound to fulfill the promises made by the relative or third person. Many people try to hide an inheritance thinking the government will not know. Not a good idea. If that is found out, you may be severely penalized.

There are legitimate ways to remain eligible as outlined in this article.

SUPPLEMENTAL SECURITY INCOME (SSI)

To qualify for SSI, you must be age 65 or older, legally blind or disabled. For adults, "disabled" means you have a physical or mental impairment that results in an inability to do substantial gainful activity that can be expected either to result in death or last continuously for at least 12 months. As of 2015, you must also have limited income and limited resources totaling $2,000 or less for individuals and $3,000 or less for couples.

Income includes money you receive from work, free food and shelter, and money you receive from other sources, including government benefit programs, friends or relatives. Your resources are things you own, including cash, bank accounts, stocks, real estate, vehicles, life insurance, personal property or other items that could be exchanged for food and shelter, even if it would have to be sold first. Some exceptions to these rules apply, such as the home you live in and a vehicle you use for necessary transportation.

Since the Social Security Administration considers inherited money as income, your inheritance could make you ineligible for SSI benefits during the month in which you receive the inheritance. But, it is considered income only in the month you receive it; after that, it is considered part of your resources. If the value of your inheritance puts your income and resources over the allowable limit, you will no longer qualify for SSI benefits. For example, if you receive benefits as an individual and already have $500 in resources, an inheritance of $1,500 or more would disqualify you for SSI since you would have reached the $2,000 limit for income or resources.

MEDI-CAL

Currently, there are two distinct programs within Medi-Cal.

The first program is the "Medical" Benefit, which acts as a health insurance benefit. The asset qualification depends on single or married status. If single, an individual must hold less than $2,000 in total assets excluding one home and one car. Life Insurance and Burial Plan must each be equal to or less than $1,500 in cash value. If married, the couple must hold less than $3,000 in total assets excluding one home and one car. Life Insurance and Burial Plan must each be equal to or less than $1,500 in cash value per spouse. In addition to the one car and one home, the value of an IRA account can also be exempted as long as the recipient is receiving a monthly distribution based on the Medi-Cal formula.

Also, there is the "Long Term Care" entitlement that covers medical expenses but also helps with Skilled Nursing Facility expenses and Hospice in most cases. If both spouses are in a Nursing Home, their joint assets cannot exceed $2000 excluding a home, car and burial policies as described above.

With a married couple, assets can be owned by the "community or healthy spouse" who is not requesting the Medi-Cal entitlement. The community spouse can own up to $109,560, excluding the home, car and burial as described above. However, the spouse requesting Medi-Cal must hold no more than $2000 in assets, excluding the home, car and burial. The IRA accounts can be excluded for both spouses based on a specific Medi-Cal regulation.

ADVANCE ESTATE PLANNING

Depending upon the size of the estate and need for tax planning, the recommended means of leaving assets to a person with special needs is by use of a Will or a Living Trust, which includes a properly drawn SNT to shelter the asset, income and resources from SSI / Medi-Cal calculations as "available income."

SNTs are recognized and accepted by the Social Security Administration, and such a sheltered estate is exempt from SSI / Medi-Cal "pay-back" requirements at the termination of the SNT.

Whether a special needs situation exists or not, we cannot forecast the future. Therefore, proper estate planning should provide for a SNT should it be needed in the future. If you have a beneficiary that is receiving government benefits, or that government benefits are contemplated in the future, the estate plan documents should include an SNT for that beneficiary.

SNTs are typically established by parents who want to provide care for their disabled child or by children who want to provide care for their elderly parents. In addition, a disabled person who expects to receive an inheritance may form a SNT for himself or herself in order to avoid losing government assistance once such funds are received.

If several relatives seek to make gifts to a disabled person, it is often advisable that the relatives make sure that their estate planning documents provide that any gifts to the disabled individual shall be made to the SNT formed for him or her.

A SNT must be irrevocable and the beneficiary of the trust cannot control the amount of or the frequency of distributions from the trust. A SNT provides money for the "special needs" of a person as a supplement to the benefits received from government programs. Such "special needs" can include education, training, transportation, insurance, vacations, electronic equipment, rehabilitation, medical equipment and other expenses.

SPECIAL NEEDS BENEFICIARY UNDER A TRUST

When a person sets up a trust to benefit a person with special needs, upon the death of the creator the trust becomes irrevocable. An irrevocable trust that does not include a special needs mechanism will jeopardize needs-based public benefits if it:

1. Requires the trustee to distribute income or principal to the beneficiary; or

2. Has a distribution standard that includes distributions for "support" or "maintenance."

When the creator of an irrevocable trust leaves an inheritance that disqualifies a benefits recipient from needs-based public benefits, a viable option under appropriate circumstances is to petition the court to modify (or reform) the irrevocable trust to create a third party SNT or, in some counties, a first party SNT. Generally, if the creator of the trust intended the irrevocable trust to be available for a beneficiary's lifetime, and some fact, lack of knowledge, drafting error, or change in the law subverts that intent, and if no beneficiary objects, then a petition for modification is a viable alternative to a "spend down" or establishment of a first party SNT.

There are several ways to modify a trust that includes such disqualifying provisions to conform to the requirements of a third party SNT and preserve eligibility for needs-based public benefits. Which method may be appropriate in a given instance turns on answers to such questions as:

  1. What was the trust creator's intent in establishing the trust?
  2. Did any legal or factual circumstances intervene between the execution of the trust and the death of the creator of the trust to subvert that intent?
  3. Will any beneficiary contest the proposed modification?
  4. Who assisted the trust creator in executing the trust instrument?

To determine whether modification or reformation is a viable option, one should first scrutinize the trust terms. The instrument may embody a mechanism for amending relevant terms. For example, the trust may allow an amendment to alter trust terms if the beneficiary is receiving public benefits or has a disability, or it may provide for change in the manner in which assets are received (in trust or outright), provided the distributive shares remain the same.

If the trust does not provide for modification, it may still be modified on petition to the court in the following situations:

  1. All beneficiaries consent (California Probate Code §15403);
  2. All beneficiaries (or at least one beneficiary) and the trust creator consent (California Probate Code §15404);
  3. Trust principal is uneconomically low (California Probate Code §15408);
  4. Changed circumstances (California Probate Code §15409); or
  5. "Unique or peculiar" circumstances (See Ike v Doolittle (1998) 61 CA4th 51).

If the principal of the irrevocable trust does not exceed $40,000, or the trust is uneconomical to administer, the trust can be terminated or even modified. In this scenario, the principal could then be distributed directly to the beneficiary who must "spend down" the assets to below $2000 within the month of receipt, or face loss of benefits due to excess resources. The person with a disability must have capacity; otherwise a conservatorship must be established before the court will approve termination. Because very few third party SNTs are funded with $40,000 or less, and the cost of preparing a petition to modify or terminate the trust can take a significant percentage of the trust's assets, this procedure is of limited practical use.

MODIFICATION UNDER CALIFORNIA PROBATE CODE §15409 IS MOST EFFECTIVE

Under California Probate Code §15409 , the court may modify either administrative or dispositive provisions of a trust or terminate the trust "if, owing to circumstances not known to the trust creator and not anticipated by the trust creator, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust." Critical issues here are these:

  1. What is the relevant purpose of the trust?
  2. Would continuation of the trust under its terms defeat or substantially impair the accomplishment of that purpose?
  3. If so, is that defeat or impairment the result of circumstances not known to and not anticipated by the trust creator?

The statute further provides that, if necessary to carry out the purposes of the trust, the court may order the trustee "to do acts that are not authorized or are forbidden by the trust instrument." California Probate Code §15409(a). In using this statute, most courts are receptive to a petition relating to the circumstances of the creator of the trust at the time of the execution of the document that provides evidence that the creator of the trust would have used a third party SNT had he or she known that the law permitted one. If the trust creator had knowledge of third party SNTs, the petition may show other facts explaining why such a trust was not drafted. The facts supporting such a petition are typically established by declaration of the underlying trust's drafting attorney, caregivers of the person with a disability, or family members who have first-hand knowledge of the circumstances leading up to the execution of the estate planning document.

Sometimes, the omission of a third party SNT can be shown to be the result of error or mistake on the part of the drafting attorney. In other cases, one may treat the omission as an ambiguity within the terms of the trust that frustrates the trust creator's intent. In such instances, common law permits the court to accept extrinsic evidence in an effort to resolve the ambiguity or explain the error. When the court then finds "peculiar" or "exceptional" circumstances, it may exercise its equitable power to modify the trust to accomplish the trust creator's intent.

INTESTATE ("NO WILL") OR TESTATE ("WILL") BENEFICIARY

Parents or relatives who die without a will transfer real and/or personal property to their heirs related by blood. This is called "intestacy". It will usually incur probate costs. If such a beneficiary has special needs, this intestate inheritance could result in the loss of SSI and Medi-Cal eligibility, liability for overpayments of benefits received, and even the loss of the entire inheritance to liens by State and /or Federal agencies for benefits provided on the basis of financial indigence. The beneficiary is thus forced to attempt to shelter such an estate by petitioning the Court to establish a SNT and any remaining estate is subject to SSI / Medi-Cal "pay-back" at the termination of the SNT.

The transfer of property by means of a Will usually incurs probate costs. Gifts to a special needs beneficiary without the shelter of a properly drafted SNT create a formal estate. The beneficiary's remedy is to shelter such an estate by petitioning the Court to establish a SNT, resulting in periodic future accountings reducing the amount of that estate and any remaining estate is subject to SSI / Medi-Cal "pay-back" at the termination of the SNT.

By setting up a SNT you may be able to keep your inheritance and still retain eligibility for SSI even if the amount of the inheritance would otherwise put you over the statutory limit of $2,000 for individuals and $3,000 for couples. Money in a SNT, which is managed by a trustee rather than being managed by you as the SSI recipient, can be spent only for specific purposes so the government may not count that money as part of your resources.

CONCLUSION

Intestate succession or words used in a trust or Will may require the trustee to distribute income or principal to an heir or beneficiary that is, or in the future may be, receiving SSI and/or Medi-Cal benefits. Please contact me if there are questions regarding this potential problem. I assist clients in all California counties, including Imperial County, Los Angeles County, Orange County, Riverside County, San Bernardino County and San Diego County. You can reach me by phone at 760-989-4820, by email at wksweeney@gmail.com or through my online contact form.