A sad case currently before the San Francisco Probate Court, In the Matter of the Fiorani Living Trust, deals with the tragic issue of what happens when a person abuses his position as trustee over a special needs trust meant to protect an individual who has developmental disabilities.
Years of financial mismanagement, theft, and downright despicable conduct took place before action was taken to protect Lucia Fiorani, the person the trust was designed to look after. After a concerned relative began asking questions about what was going on with the money Fiorani’s parents had left for her care, the extent of the abuse came to light. Claims against those responsible have been filed under California’s elder abuse and dependent adult abuse statutes to attempt to right the wrongs that were done.
Millions of dollars and property in the Russian Hill neighborhood are at stake as the case continues to work its way through the court system. The lesson for parents and other loving relatives is clear: take care when establishing a special needs trust.
By way of background, special needs trusts are often created for those who lack the capacity to handle their own financial affairs. They can be especially helpful for people with mental or physical disabilities who would lose public benefits (such as Medicare, Medi-Cal, or SSI) as a result of receiving an inheritance or receiving the proceeds from a lawsuit.
Special needs trusts ("SNTs') can be established for children or adults who have problems that make them unable to provide for themselves financially and who lack the ability to pay for their own medical care, food, shelter, and other basic needs. Typically, SNTs are established for people with mental or physical disabilities, health conditions,or the types of personal problems (for example, an individual with substance abuse problems) that might result in their needing public assistance now or in the future.
As illustrated in this case, there is no upper limit on the amount of money and property that can be put into a special needs trust for a loved one's benefit. Many people even use life insurance policies to fund these kinds of trusts.
Special needs trusts, when constructed appropriately, can help protect the disabled person from being taken advantage of and losing the money that is intended for their benefit.
Such trusts offer a way to hold assets for your loved one, while at the same time preventing him or her from being disqualified from receiving Supplemental Security Income (‘SSI’) or Medi-Cal. Although your loved one is named as the beneficiary of the trust, the assets are not counted as his or her available resources because the assets are not within his orher control.
A gift or inheritance that leaves your disabled beneficiary with non-exempt assets in excess of $2,000 is basically a gift to the federal government, as it will disqualify the beneficiary from receiving public benefits until the assets are “spent down” to $2,000 or less. He or she may also not qualify for private health insurance, and could be left paying for his or her medical expenses. Given the high cost of medical treatment, disqualification from Medi-Cal could cause your beneficiary’s inheritance to be exhausted in short order. After that, your beneficiary will be completely dependent on other family members and meager governmental assistance.
To avoid such a situation, you should act now to set up a special needs trust to protect your beneficiary when you’re no longer around to do so. There are many other considerations that must be kept in mind when you are planning for a special needs individual and this article was meant to make you aware of but a few of them. For more information, feel free to contact my office.
See Our Related Blog Posts:
Special Needs Trusts: Estate Planning Strategies for the Special Needs Family
Asset Protection and Rising Financial Abuse of the Elderly
All the best,
Inheriting a large sum could have dire consequencies
This delicate but important topic does not often receive the due attention it deserves. However, there could be some serious personal consequences if a person with substance abuse issues suddenly inherits $20,000 – or $2,000,000 - and can do with it as he or she pleases, especially if there is no parental supervision in place. In essence, this could be as severe as a death sentence.
There are ways to address this matter. The first obstacle to overcome is to be completely honest with yourself about your adult child’s situation and addictions. Don’t imagine that the trauma of your passing will “cure” any preexisting problems with substance abuse.
Choosing your trustee carefully
One of the most important steps to take is to not make this adult child the trustee of your trust (or the executor of your estate); that should be a “given.” Choose a neutral trustee who can, without fail, withhold distributions of funds until it is appropriate; even if the adult child should come knocking on the door in the middle of the night looking for some extra cash for “rent.” Some might think this is too harsh and they establish monthly distributions to their adult child, but this can also be too much for a person in their position to handle. It is generally best to restrict access to cash and assets as much as possible and set up certain controls.
You can empower your trustee to only distribute funds if, and only if, the adult child is showing no signs of addiction and if they pass periodic or random drug tests given by a third-party.
Setting up conditions for distribution
No doubt this will put the trustee in a difficult position, so don’t choose someone who already has an emotional relationship with the adult child. At the same time, don’t succumb to the fear that your adult child will never be able to control their substance abuse issues. You can set up your estate to provide funds for counseling or drug treatment, or to permit the trustee to make additional distributions upon successful completion of appropriate milestones (think of it as the carrot at the end of a stick). If an adult child fails to pass a drug test or complete a rehabilitation program, you can set up your estate plan to stop all further distributions forever, for a finite time or until the person can pass a drug test consistently.
Money management issues
Problems can come in other forms, too, so don’t think that your estate only needs protection from a person with a history of drug abuse. Persons with money management issues, gambling addictions or financially-controlling spouses may benefit from the restrictions you plan now with your trustee. Again, the key is to be open and honest with yourself about your adult child’s situation and to plan for the time when you won’t be around to give encouragement or “tough love.”
A solid estate plan with some restrictive measures in place can literally save a person’s life, so don’t put off a decision that is as important to you as it will be for those you leave behind. A knowledgeable and experienced estate planning lawyer can help you set up a thoughtful and generous inheritance plan for those you love most.
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All the best,
Special children require special estate planning. If the child is receiving government benefits, it is especially important to let family members know that their well-meaning gifts must be carefully planned. For example, a well-meaning loved one could accidentally disqualify the child’s government benefits.
For example, Mike is 22 years old and suffered a birth defect that makes it difficult to walk. He lives in subsidized housing and makes ends meet by working at a local grocery store a few hours each week.
Sometimes his parents help him with money, but Mike also receives a monthly Supplemental Security Income (SSI) payment of $800.
Mike’s parents created a first party Special Needs Trust (SNT) to provide for his care and needs. Recently Mike’s Aunt Joan died. Unbeknownst to Mike’s parents, Joan left Mike $60,000 in her trust.
Aunt Joan’s thoughtful gesture ended up creating serious problems for Mike. Suddenly he had more than $2,000 in the bank – which can disqualify him from receiving SSI. Luckily, it was not enough to disqualify him for his subsidized apartment, or he could have ended up out on the street.
This is a serious problem for a special needs family.
Strategies for the special needs family
In this case, there are a number of strategies that will permit Mike tp benefit from his Aunt Joan’s gift and still keep his aid:
- The first party Special Needs Trust that Mike’s parents created includes a state reimbursement or “payback” provision. If Mike transfers the monetary gift from Aunt Joan into the Trust, his eligibility will be undisturbed.
- Mike can spend all the money before the end of the month in which he received it.
- Mike can purchase or invest in exempt resources, such as an automobile. If Mike inherits enough money, he can use the gift to buy a residence for himself.
Consider the consequences of large gifts
Things would have been much simpler if Aunt Joan had left the money to the SNT Mike’s parents created for him – there would have been no disruption in or threat to his eligibility for certain services.
It’s important that parents let their friends and relatives know about any Special Needs Trust they may create for their special needs child. Parents should also make those loved ones aware that any contributions they wish to make need to go into that Trust so the child’s access to public benefits won’t be jeopardized.
There are many other considerations when you are planning for a special needs child. This article was meant to make you aware of a few of them. For more information, please feel free to contact my office.
All the best,