It is important to provide for each person on your inheritance list in the optimal manner. You are not compelled to slice everything up like a pie as you provide direct inheritances to each family member with no strings attached.
If you act without knowledge of all the facts, negative consequences can result. With this in mind, let’s look at third party special needs trusts.
Many families have members with special needs. If you want to provide for a person with a disability, you should keep benefit eligibility in mind.
Some people with disabilities must rely on Medicaid coverage. In California, the program is called Medi-Cal. This is a health insurance program that is jointly administered by the federal government along with each respective state government. To qualify for Medi-Cal, you must be able to prove that you have very limited financial resources.
Benefit eligibility is not permanent. Eligibility status could change if the benefit recipient was to come into some money via an inheritance. Medi-Cal coverage could be lost.
Supplemental Security Income (SSI) is another government program that is potentially available to people who can demonstrate financial need. This income can be very important for people with disabilities, and once again, a direct inheritance can result in a loss of eligibility.
To provide for a loved one with a disability without jeopardizing eligibility for government benefits, you could create a third party special needs trust. The trust is called a third party special needs trust because the funding is coming from someone other than the beneficiary.
In the trust agreement you name a trustee to administer the trust. The trustee can use assets that have been conveyed into the trust to satisfy the supplemental needs of the beneficiary. These would be needs that are not being met by the government benefits.
To preserve benefit eligibility, the beneficiary cannot directly control the assets in the trust or handle the resources. The trustee must use the assets for the benefit of the individual with special needs.
When a third party special needs trust has been properly created and administered, the Medi-Cal program does not seek reimbursement from the trust estate of the beneficiary’s special needs trust after his or her passing.
There is another type of special needs trust called a first party or self-settled special needs trusts. This type of trust is funded with the beneficiary’s own resources. This often requires a court petition to establish. While Medi-Cal eligibility can often be preserved if this type of trust was created, the Medi-Cal program will likely seek recovery after the death of the beneficiary to the extent benefits were conferred.
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