An Overview of Trusts and Wills

posted on 12/11/95

Some families have disabled children with mild impairments, or have such large estates that they can safely leave a large inheritance to a child with a disability, not caring whether it results in termination of certain public benefits, such as SSI (Supplemental Security Income) or Medi-Cal. Most families, however, are not as well off. Either the child has disabilities which pose a more substantial handicap, or the inheritance is not large enough to support the child for a significant period of time. Such families typically face three options. One is an informal agreement (or moral understanding) that, say, one adult offspring will use part of an inheritance to meet the special needs of a sibling with a disability. A second is a discretionary, special needs trust. A third is to leave the disabled family member only assets which are not countable for SSI or Medi-Cal purposes _ e.g., a home occupied by the offspring with a disability, and certain other assets.

A will is a legal document expressing binding intentions about what the person wants done with his or her property after death. States have laws for the distribution of property in the event (1) there is no will or (2) an heir is not mentioned or otherwise provided for in the will. In such cases, the law provides certain shares to closest surviving relatives. The ownership of some assets, such as real property held in joint tenancy and life insurance passing to a named beneficiary, passes outside of the probate process.

If there is no will, the child with a disability will inherit a share of the estate, as provided for in state law. This is likely to result in termination of certain needs based public benefits, such as SSI and Medi-Cal insurance coverage, until all but $2,000 in countable assets remain. If there is an otherwise valid will, but the child with a disability is not mentioned, the child may inherit the share that he or she would have inherited had there been no will. Government agencies are likely to argue that the child was inadvertently overlooked.

A trust is a legal entity like a corporation. The creator of the trust establishes its purposes. Title to assets is placed in the hands of a trust, with directions to the trustee(s) as to how income from the trust, and assets in the trust, are to be used. If a parent does not want to disrupt receipt of public benefits, the usual kind of trust set up for dependent children without disabilities (a support trust) is not a good idea. A support trust is set up with directions to the trustee to buy food, shelter, clothing, medical care, educational services, and other basics. Instead, a discretionary special needs trust is indicated. The reason is that public entitlement benefits (e.g., SSI, Medi-Cal) would be terminated if the trust were deemed a countable resource. If the purpose is clear (special needs only), and the instrument carefully drafted, Social Security and Medi-Cal rules and regulations will not consider a special needs trust as a countable resource to the SSI recipient.

Discretionary, special needs trusts have two critical elements. The assets and income are to be used only at the complete discretion of the trustee (not at the beneficiary's discretion), and then only to supplement that to which the beneficiary is otherwise entitled. In other words, the trust language forbids the trustee to use trust income or assets for the basics of food, shelter, clothing, and any care (e.g., health services), supervision, education, or training to which the person, by reason of citizenship, disability, or low-income status, would otherwise be entitled.

The creator of the trust typically specifies the kinds of extras that the trustee may purchase: for example, (1) a trip to see a relative; (2) a set of dentures, when neither Medi-Cal nor any other insurance is obligated to pay; (3) a stipend for a friend or personal advocate who will keep up on the consumer's life and well-being; and so forth. Even in these cases, to avoid problems the trustee should pay the dentist (and others) directly, rather than hand money over to the beneficiary to make payment, since the latter might be considered countable income to the beneficiary.

Trusts can be (1) living or testamentary, and (2) revocable or irrevocable. A living trust is one established by its creator during the creator's lifetime. Typically, the creators (e.g., parents) serve as trustee(s), with successor trustees named for when the creator dies or becomes disabled. Living trusts are typically revocable, unless there is a tax or other benefit from being irrevocable. A testamentary trust is but a shell, until assets pass into the hands of the trust upon the creator's death, according to a will or other instrument. Since life insurance benefits do not have to go through probate, using such proceeds is one common way of funding a testamentary trust.

Overview written by John Shea for Allen, Shea & Associates