Getting the news that you have inherited money or property from a family member is usually a good thing. For some people, it may be more of a concern. If you receive income-based government benefits, you may be concerned that your benefits will be in jeopardy if you receive a significant inheritance. For instance, if you receive Medi-Cal or Supplemental Security Income (SSI), you assets must not exceed a certain amount in order for you to remain eligible. If that’s the case, you need to protect your inheritance from being counted as income or an asset. Another common concern is the inheritance tax. Inheritance planning can address all of these issues.
How a special needs trust works with inheritance planning
Not everyone who receives an inheritance will need a special needs trust. But if you receive government benefits, then a special needs trust is something you should discuss with your estate planning attorney. Even then, only people whose government benefits are need-based or require limited resources or assets. For example, if you receive benefits from any of the following you may need a special needs trust:
- Medi-Cal Waiver Programs
- Section 8 Housing
- Supplemental Nutrition Assistance Program (Food Stamps)
- Residential Housing through the Division of Developmental Disabilities (DDD)
Eligibility for other programs that are “means” based, as opposed to needs-based, are not affected by receipt of an inheritance. Discuss your specific situation with your estate planning attorney to be sure your rights are protected.
Others who may need a Special Needs Trust
Another purpose of a special needs trust, unrelated to inheritance planning, is to benefit disabled individuals. For example, individuals with permanent or severely disabling conditions such as blindness, paralysis or developmental disabilities, who typically receive government benefits automatically, may also find a special needs trust valuable. The same is true for people you may be incapable of managing an inheritance prudently. Trusts created for this purpose are typically referred to as “spendthrift” trusts, as they are meant to keep assets out of the hands of the beneficiary, and under the control and management of the trustee.
Does California have an inheritance tax?
Inheritance taxes are not imposed by the federal government. Some states still impose an inheritance tax, including Iowa, Kentucky, Nebraska, and Pennsylvania. California eliminated its inheritance tax as of January 1, 2005.
You can turn down an inheritance
It is possible to reject an inheritance if you feel that is a better choice. However, rejecting an inheritance requires a bit more than telling the executor thanks, but no thanks. There are procedures to be followed, as set out by the laws that govern inheritances. In order to be sure that you never become the legal owner of the property and to correctly reject the inheritance, you need to create a disclaimer in writing and deliver it to the person who is in control of the estate. In the majority of cases, that would be the trustee of the trust or the executor of the estate. Generally speaking, the disclaimer must be submitted within 9 months of the decedent’s death. The most crucial part of disclaiming an inheritance is being sure not to accept any benefit from the property.
The importance of inheritance planning
After considering everything, if you believe the best choice for you is to disclaim or reject your inheritance, you should really discuss this decision with a California estate planning attorney. Your attorney will be able to take the necessary steps to guarantee that your disclaimer is handled correctly, which will ultimately lower your risk of having difficulties in the future. As with any estate plan, your inheritance plan must address both your present and future financial goals.
Determining how an inheritance would fit into your plan
If you decide to ultimately accept your inheritance, the first step is to consider the nature of the assets you are due to inherit. For example, if you wait too long to sell an asset you inherited, you could increase the chances of incurring unfavorable tax consequences. If you are inheriting a retirement account, you must have a plan for how you will withdraw the retirement funds. Being aware of all of your options when creating an inheritance plan that will essentially protect you from possible tax penalties.
Download our FREE estate planning checklist here. If you have questions regarding inheritances or any other inheritance planning needs contact the Northern California Center for Estate Planning and Elder Law for a consultation, either online or by calling us at (916) 437-3500.