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, your son cannot have more than $2,000 in savings or other nonexempt assets and still remain eligible for these benefits.  The receipt of an inheritance from you would likely put them 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 to thereby enhance your son’s quality of life in a kind of public–private partnership.

You would create the SNT as part of your own estate plan, and you would designate someone other than your son to be the trustee, such as one of your other children, a relative or even the trust department of a bank. So long as properly created and properly managed, the funds in the SNT would supplement his needs by direct payment to third-party providers of goods and services, while preserving your son’s public benefits.

Currently, a single individual on SSI, living independently, would receive  $866.40 per month in California and $921.40 if blind. Since the SSI program is designed to cover food and housing expense, it would be best for the SNT to pay for things which are not food or housing, e.g.  transportation, cell phone, computer, etc.  Reason: payments for expenses which are not food or housing would result in no reduction in his SSI or Medi-Cal benefits.

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 $1500 per month, your son could pay $500 of the cost out of his SSI, and the SNT could pay the $1,000 balance directly to the lessor.  Your son’s SSI would only then be reduced by only $257 per month. Not a bad trade-off.  Further, if the SNT had sufficient assets, it could actually pay much more than $1,000 per month to providers of goods and services for his benefit, and here’s the beauty about how this works: no matter how much the SNT pays toward your son’s monthly housing or food expense,  the maximum reduction in his monthly SSI benefit would never exceed $257.  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 third-party providers of goods and services on his behalf.

Parents who have a child receiving public benefits, such as SSI or Medi-Cal, should almost always consider creating an SNT as part of their estate plan and thereby preserve their child’s continuing access to those benefits while providing a funding source for the child’s supplemental needs.