Q. One of our adult children has a disability and receives SSI and Medi-Cal. We are concerned that an inheritance may terminate his benefits. We have heard something about a Special Needs Trust. Can you tell us more about that?
A. Sure. As you apparently know, under present rules your son cannot have more than $2,000 in savings or other nonexempt assets and still remain eligible for these benefits. His receipt of an inheritance from you would likely put him over that ceiling and thereby terminate his eligibility. However, the law permits you to create a Special-Needs Trust (“SNT”) to receive his inheritance without jeopardizing his public benefits. The law’s purpose is to allow you to set aside “private funds” to supplement his SSI and/or Medi-Cal, and thereby enhance his quality of life in a kind of public–private partnership.
You could create the SNT as a stand-alone trust for your son and fund it during your lifetime, or you could do so as part of your own estate plan and fund it upon your demise. In either event, you would designate someone other than your son to be the Trustee to hold and manage those funds, such as one of your other children, a trusted relative, or even the trust department of a bank. So long as properly created and managed, the funds in the SNT would allow the Trustee to pay third-party providers of goods and services to him, while also preserving his public benefits.
Currently, a single individual on SSI in California, living independently, can receive a monthly benefit of up to $1,040.21(in 2022) or $1,110.26 if blind. Since the SSI program is designed to cover food and housing expense, there would be a modest reduction in his SSI if the SNT paid for those same expenses. Therefore, it is usually best for the SNT to pay for expenses which are not food or housing, e.g. transportation, cell phone, computer, training, etc. Reason: payments for expenses which are not food or housing would result in no reduction in his SSI or Medi-Cal benefits.
The ISM Reduction: A Benefit Opportunity: However, the SNT could even assist with the cost of food or housing, but in exchange for only a modest reduction in SSI. Example: if the cost of an apartment were, say, $2,000 per month, your son could pay, say, $50 from his SSI toward that expense, and the SNT could pay the $1,950 balance directly to the lessor. Your son’s SSI would then only be reduced by a flat $300.33 per month (in 2022), which is called the “Presumed Maximum Value” or “PMV”. Not a bad trade-off. I call this the “PMV leverage”.
Further, if the SNT had sufficient assets, it could actually pay virtually any amount per month to any number of providers of goods and services to him, and here’s the beauty about how this works: no matter how much the SNT pays to all such 3rd parties for your son’s monthly housing or food expense, the maximum reduction in his monthly SSI benefit would never exceed the current PMV of $300.33 per month. Thus, a well-endowed SNT could generate a substantial benefit to a person with a disability, with only a modest reduction in his or her SSI and usually none to his or her Medi-Cal eligibility. The SSI rules which govern here are referred to as the “ISM Rules”, where ISM stands for “In Kind Support and Maintenance.”
Caution: the SNT should never distribute money directly to your son, as there would then be a dollar-for-dollar reduction in his SSI. Rather, payments should always be made to the third-party providers of goods and services to him.
Note: if your son were receiving only Medi-Cal benefits, know that the Medi-Cal resource rules will be changing soon, and I plan to write an article on topic very soon.