Question: My mother and father drafted a living trust some time ago. My father passed away a few years ago, and my mother just recently died. They gave the estate to me and my two siblings. They named me as trustee.
My brother and I are able to receive our share of the trust property without any problems, but our sister is disabled and has trouble managing her own finances. Over the past couple of years, I have been increasingly taking care of more of her affairs. Looking over the trust, it doesn’t look like my parents created any “special needs trust.” I don’t know why, as my mother was clearly aware of my sister’s disabilities.
Now I am concerned about what might happen to my sister’s government benefits if she receives the inheritance. She can only receive government benefits if she has a limited amount of money in her accounts. Can she just refuse to take it and have me put the money in an account in my name? She knows and my brother knows that I am here to take care of her and would not use her money for myself.
Answer: Although your idea of refusing the inheritance appears to make sense, it may make matters worse.
A person like your sister who is receiving government benefits typically has a legal obligation to disclose whenever he or she becomes entitled to an inheritance. That obligation includes disclosing any refusal, or “disclaimer,” of such an inheritance. Even though the funds would bypass your sister’s account and not be “seen,” the fact that they were available could jeopardize her benefits and possibly place you in legal jeopardy as well.
Even after the death of your mother, there are ways to set up a special-needs trust for your sister. After your mother’s passing, her revocable trust became irrevocable and incapable of amendment. You may, however, be able to petition the superior court to modify your parents’ trust to create a special-needs trust that would receive your sister’s inheritance. Assuming that you, your brother, and your sister all consent to the change and can show that the material purpose of the trust remains intact, the court will likely approve the modification or amendment.
This would be known as a “third party” special-needs trust and has certain advantages, namely that any remainder interest after the death of your sister could pass to other family members.
The other possibility is to have your sister set up a special-needs trust on her own. This assumes that she has the mental capacity to do so on her own. In other words, she accepts the gift from your mother, but she deposits the funds into a special-needs trust created by herself. This is known as a “first party” special-needs trust. Prior to December 2016, the creation of a first-party special-needs trust typically required petitioning the court for approval. But one of President Obama’s last acts in office was to allow a special needs individual the power to create his or her own special-needs trust.
Even though setting up a first-party special-needs trust may not involve going to court any longer, there may be good reasons why going to court for a trust modification makes sense. A lawyer should be able to discuss these matters in more detail.
If your sister does not want to or cannot create her own special-needs trust, another option is a pooled special-needs trust. A pooled special-needs trust is when special-needs beneficiaries place their funds under the control of a nonprofit entity that manages the funds. Each special-needs beneficiary has his or her own account, but the overall investment control of the assets is run by the nonprofit.
Each of the options above has its own advantages and disadvantages, so it is a good idea to discuss your options with a lawyer. But stashing the cash in your own account or having her refuse the money is not a good strategy. You can accomplish both of your objectives, allowing her to enjoy your parents’ gift while preserving her government benefits.
Preston Morgan is a partner at Kopper, Morgan & Dietrich, a Davis law firm providing family law, estate planning and trust litigation representation. His column is published every other week in the Davis Enterprise. To pose a question to Preston Morgan, contact him at https://kopperlaw.com.
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