The Probate Process in California
Responsibilities of Executor or Administrator
Out-of-State Issues During Probate
How Does Inheritance Affect My “Means Tested” Supplemental Security Income (SSI) Benefits And/Or My “Means Tested” Medi-Cal Benefits?
About Supplemental Security Income (SSI)
SSI is a financial safety net intended for people with limited income and assets who are at least 65 years old, disabled or legally blind. An inheritance will be counted as income the month you receive it and will likely disqualify you from receiving SSI benefits that month. Thereafter, what you still have after that month will be considered an asset and it may continue to disqualify you.
Medi-Cal provides medical benefits and long-term care assistance.
To qualify for Medi-Call, a person must hold assets valued at less than $2000 (with one’s house and car exempted) and life insurance and benefits valued at less than $1500. A married couple must hold less than $3,000 in total assets excluding one home and one car, according to the Medi-Cal formula.
The long-term care entitlement covers medical expenses as well as nursing home and hospice care, in most cases. For both spouses in a nursing home to qualify for this benefit, their assets must total $2000 or less.
Advance Estate Planning
A special needs trust (SNT) makes it possible to leave assets to a person with special needs. This is done by use of a will or a living trust that may include a properly drawn SNT to shelter the asset, income and resources from SSI and Medi-Cal calculations.
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:
- Requires the trustee to distribute income or principal to the beneficiary; or
- 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:
- What was the trust creator’s intent in establishing the trust?
- 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?
- Will any beneficiary contest the proposed modification?
- 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 a 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:
- All beneficiaries consent (California Probate Code §15403);
- All beneficiaries (or at least one beneficiary) and the trust creator consent (California Probate Code §15404);
- Trust principal is uneconomically low (California Probate Code §15408);
- Changed circumstances (California Probate Code §15409); or
- “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 the 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, critical issues are:
- What is the relevant purpose of the trust?
- Would continuation of the trust under its terms defeat or substantially impair the accomplishment of that purpose?
- 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 an 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 an 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.
Management Of An SNT
To prevent the SNT from being counted as an SSI recipient’s asset, a trustee must manage money in an SNT, and only for allowable purposes.
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, Riverside County, San Bernardino County and San Diego County. You can reach me by phone at 800-575-9610 or through an easy online form.