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I Just Inherited $100,000, and I’m on Public Benefits—
Now What Do I Do???

Peter S. Stern, Esq.

When it comes to "frequently asked questions" for practitioners in elder law, this one is a doozy. I get several calls a week with variants on the above, making me wonder about how little communication there is between family members. There are several approaches to this problem for a benefits recipient between the ages of 18 and 65 who has capacity. But before exploring the "easy" cases, I will look at some of the harder ones. Here are some of the familiar scenarios I face, and how I try to help these clients, under the "four toos": Too Young, Too Old, Too Impaired, and Too Late.

I. Too Young

The client calls to report that his son Jimmy, who is developmentally disabled and on public benefits, will be getting an inheritance from an aunt on the east coast. The attorney back east says he will be sending a check for $100,000 next month. What do we do? The answer in this case depends upon how the money became available. Probate Code Sections 3410–13 provide for the disposition of funds belonging to a minor, other than funds disposed of under Section 3602. Under the provisions of Sections 3412–13, on petition to the court by the parent or guardian, the funds can go to a guardianship account, a blocked account, or a custodianship account established under the Uniform Transfers to Minors Act. (Amounts that do not exceed $20,000 can be handled under different terms.)

a. If the inheritance was through a decedent estate administration in California, or in another state, there will presumably be an order of the court making the distribution. Although Section 3600 proceedings are not specifically intended for dealing with problems of this nature, it should be possible, if the inheritance is coming through a court order, to go to court under California’s revised Section 3600 proceedings to have a special needs trust established by a California court, since the court order can be construed as a judgment. The recently amended provisions of Sections 3600 et seq. permit a court to establish a special needs trust for a minor that stays in trust after the minor attains age 18, even if the court that granted the "judgment" did not order establishment of a trust. Trusts established under this section have to comply with the special provisions of Sections 3604–3605 as well as the d4A provisions outlined in 22 Code of California Regulations 50489.9.

b. If the distribution comes from another source, say, an insurance payout, or a trust distribution, there are other possibilities.

Is it possible to have the funds held by a custodian under the Uniform Transfers to Minors Act (Probate Code Sections 3900–3925)? If the donor has left the funds to a custodian, of course. But even if the donative instrument does not specifically leave the funds under the California Act or the transfers to minors act of another state, it is possible under Section 3906 for the trustee or personal representative making the distribution to transfer to a custodian under CUTMA if it is in the best interests of the minor. If the sum exceeds $10,000, court approval is necessary unless the transfer is "to a custodian who is either (A) a trust company or (B) an individual designated as a trustee by the terms of a trust instrument which does not require a bond." (Probate Code Sec. 3906(C)(3)).

And if there is no custodian named in the donative instrument, which is always the case in these after the fact planning situations, Probate Code Section 3905 provides that:

"(c) If the testator or settlor has not nominated a custodian under Section 3903, or all persons so nominated as custodian die before the transfer or are unable, decline, or are ineligible to serve, the personal representative or the trustee, as the case may be, shall designate the custodian from among those eligible to serve as custodian for property of that kind under subdivision (a) of Section 3909."

Note that this section permits nomination of the custodian by the personal representative or trustee, and in the case of an out of state administration, this places the matter in the hands of someone who may not be knowledgeable about the circumstances of the minor.

And if the funds are in the hands of a custodian, can they be used for anything at all until the minor is age 18?

Under Probate Code Sec. 3914,

"(a) A custodian may deliver or pay to the minor or expend for the minor’s benefit as much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (1) the duty or ability of the custodian personally, or of any other person, to support the minor or (2) any other income or property of the minor which may be applicable or available for that purpose.
(b) On petition of an interested person or the minor if the minor has attained the age of 14 years, the court may order the custodian to deliver or pay to the minor or expend for the minor’s benefit so much of the custodial property as the court considers advisable for the use and benefit of the minor."

Aren’t funds in custodial accounts available, and thus countable resources?

According to the SSA POMS, custodial accounts are not counted as resources until the funds are turned over to the minor: SI 01120.205 Uniform Gifts to Minors Act, B 1, states:

While Donee Remains a Minor:
UGMA property, including any additions or earnings, is not income to the minor; the custodian’s UGMA disbursements to the minor are income to the minor; the custodian’s UGMA disbursements on behalf of the minor may be income to the latter if used to make certain third party vendor payments (SI 00835.360).
When Donee Reaches Majority:
All UGMA property becomes available to the donee and subject to evaluation as income in the month of attainment of majority.’

c. What about the insurance payout? Insurance companies generally take the position that absent a direct instruction from the purchaser of the policy to pay to a custodian, an insurance payout has to go directly to the beneficiary. In the case of a minor, this means establishment of a guardianship or deposit of the funds into a blocked account–the option described above in Sections 3412–13. Court action is necessary in either case, and in the case of establishment of a guardianship, the issue next posed is how to make the guardianship funds unavailable for the support needs of the minor who is receiving public benefits.

d. How can I protect funds in a guardianship estate? The least flexible solution is to seek an order transferring funds in the guardianship to a blocked account. Because the substituted judgment provisions of the code (Sections 2580–86) apply only to conservatorships, guardianships do not have a provision analogous to conservatorships for using substituted judgment to create a trust, and it would be necessary to utilize the provisions of Sections 2590–91 to create a trust, since those powers permit a guardian to enter into a contract on behalf of the guardianship estate (Probate code Section 2591(a)). Using this section, a guardian can seek permission to establish a special needs trust for the minor under court order, which would satisfy the provisions of 42 USC 1396p(d)(4)(A).

e. And what about those blocked accounts? Aren’t they "available?" Although I haven’t found a POMS directly on point, I’d argue that if a custodial account were considered unavailable, except for distributions actually made to the minor, a blocked account would fall in the same category. And, when pushed, I think Medi–Cal can be held to the same standards that the POMS set out.

II. Too Old

These calls are really upsetting. This might be the client’s call, but more likely it’s the child’s call or the spouse’s call. Mom is 80 years old, in Shady Acres Convalescent on Medi–Cal. Her sister back in Des Moines died and left her $100,000. What to do? In the background is, of course, the language that frames availability of the d4A trust: to be eligible, one has to be under age 65 (because at that age one is no longer disabled, one is old.) So mom can’t transfer her inheritance to the daughter or to the daughter and other children without putting at risk her long term care Medi–Cal. Let’s also look at the possibility that mom is on SSI and Medi–Cal but is not in a long term care facility.

a. Can a pooled trust work? Pooled trusts are described in 42 USC 1396p(d)(4)(c) and 22 CCR 50489.9:

    42 USC 1396p(d)(4): "(C) A trust containing the assets of an individual who is disabled (as defined in section 1614(a)(3)) that meets the following conditions:

    (i) The trust is established and managed by a nonprofit association.

    (ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts.

    (iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1614(a)(3)) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.

    (iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this title."

Funds transferred to pooled trusts may be out of the control of the individual who sets the account up for the disabled person, unlike a d4A trust, which is administered by the trustee selected by the person who creates the trust. Further, the trust accounts either pay back to the state for medical services provided or stay in trust for the benefit of other beneficiaries. The author is not aware of arrangements in pooled trusts that permit them to pay out to designated beneficiaries, after repayment to the state, in a fashion similar to d4A trusts.

In the case of an individual over 65, it is not likely that there will be an eligible family member still living. Thus, it is most likely that one would create the account by going to court.

b. Can the recipient simply transfer the inheritance? If the recipient is not receiving long term care Medi–Cal or its equivalent, there is no transfer penalty. For SSI, however, a transfer of a resource will produce ineligibility for the number of months that the SSI benefit, including the state payment, as denominator, goes into the transferred amount, with an upper limit of 36 months of ineligibility. You really have to do the math here. A person who gets $700 in Social Security and $156 in SSI will lose the SSI for 36 months—a total of $5,616. Interest on $100,000 at 5% per year for three years is $15,000. But one must also factor in loss of IHSS, if relevant.

c. But if one transfers in the month the inheritance is received, isn’t this a transfer of income and thus not subject to SSI transfer penalties? Yes–nd no. As CANHR attorney Tony Chicotel demonstrated in a recent court case, the SSI rules that are part of the Code of Federal Regulations consider a personal injury settlement as unearned income, and this does not count as a resource until the first of the month after receipt. The federal regulations treat inheritances the same way. 20 CFR 416.121(e), 20 CFR 416.1123, 20 CFR 416.1207. The POMS, however, attempt to count an inheritance as a resource at the moment of receipt, notwithstanding the conflict with the CFR language: SI 01150.001 defines transfer of ownership of resources, which is determined by what one owns at the beginning of the month, and SI 01150.B.5 makes a special exception to the first of the month rule only for inheritances. There is room here for an aggressive attorney to challenge a Social Security ruling based on the POMS where there is a clear conflict with the regulations.

d. And wouldn’t Mom be better off simply transferring the inheritance anyway? Remember that for the time being we are still under the halcyon transfer rules of MCCA, spelled out most clearly in All County Letter 90–01 and the accompanying draft regulations. California has not yet adopted laws or regulations to implement the Deficit Recovery Act of 2005; so, mom could give away $10,000 each to her three children, in a series of concurrent transfers, and be eligible for her long term care coverage in the month following the month she made the transfers. We hope that her children, suitably counseled, have established a third party special needs trust, to which they will then transfer their gifts.

III. Too Impaired

What happens when the beneficiary simply can’t act at all, because of incapacity?

a. Is a trust for a person with disabilities (Probate code Sections 3600 et seq.) appropriate here? If the inheritance comes from a court order, it would be appropriate to use the Probate Coder Section 3600 procedure described at the beginning of this article. In this fashion, it would be possible to implement and fund the trust without the need for creating a conservatorship. The special needs trust would have to comply with the requirements of Sections 3604–3605 and also with the d4A provisions.

b. Is it possible to use a conservatorship to set up a d4A trust? Yes. Most practitioners in this field concluded that the restrictive language in the substituted judgment provisions (Sections 2580–2586) don’t apply to a trust to be established with something other than a personal injury judgment or minor’s compromise. Section 2580(a) (5) permits use of the doctrine for "Creating for the benefit of the conservatee or others, revocable or irrevocable trusts of the property of the estate, which trusts may extend beyond the conservatee’s disability or life. A special needs trust for money paid pursuant to a compromise or judgment for a conservatee may be established only under Chapter 4 (commencing with Section 3600) of Part 8, and not under this article."

Thanks to the efforts of attorney Bruce Feder in San Francisco, we now have an appellate case to cite: Conservatorship of Kane, 137 Cal. App. 4th 400; 40 Cal. Rptr. 3d 378 (2006). The conservatee, a developmentally disabled individual, had received an inheritance from his mother, and the conservator sought to use a d4A trust as a vehicle for sheltering the inheritance so that the conservatee could continue to receive public benefits. On appeal the court held that the substituted judgment statute was appropriate for dealing with funds received from inheritances and that it was possible to establish a self settled d4A trust in this manner.

IV. Too Late

Or, why didn’t they call the attorney before mailing the check? Your client calls to report that she received a check for the inheritance, $100,000, last month. Now what?

Under the law, the client has a duty to report the receipt of the check. In the month of receipt, it was income, and now it is a resource. The client is now over resources for SSI and will have to refund the SSI income received in the previous month. Can she keep her benefits?

a. Is an outright transfer possible or appropriate? My first questions at this point go to what benefits the client was receiving. If it turns out that the client got very little SSI on top of Social Security Disability but was relying upon Medi–Cal, perhaps an outright transfer is the appropriate strategy: the client will lose SSI but can retain Medi–Cal. And if eventual long term care Medi–Cal is a consideration, then the transfers can be done in concurrent transactions, to minimize eventual ineligibility. Keep in mind that once California implements the transfer provisions of the Deficit Reduction Act of 2005, the concurrent transfer solution will no longer be available.

If the client employs a transfer strategy, I would urge the donees to establish a precatory third party special needs trust for the benefit of the donor. With such a trust, there will be no payback to the State.

b. Can the client establish her own special needs trust? No, but if she has a living parent or grandparent, he or she can be the settlor of a d4A trust to be funded by the inheritance. One of the most difficult aspects of setting up a d4A trust is in choosing the proper trustee. A trust of $100,000 is too small to induce a trust company to serve as trustee, but there are many private professionals who will accept to serve as trustees with a corpus in this range. Best might be the use of one or more knowledgeable family members, if there are any available.

c. And if there are no eligible family members? The disabled person can appoint an attorney in fact, and can give the power, in the power of attorney, to establish the special needs trust. Under the well–developed procedure, the attorney in fact then petitions the court to pass on the act of establishing the trust, and once approved by the court, then settles the trust. The disabled person can then transfer the inherited funds to the trustee of the trust–who is often the agent. Since the trust was established on the basis of approval by a court order, the trust meets the d4A requirement of being established "by a parent, grandparent, legal guardian of the individual, or a court."

V. The Easy Cases: Reformation of the Donative Instrument

I have found most courts I deal with to be sympathetic to the situation of a trust beneficiary who is disabled and on public benefits but for whom the settlor has provided either a support trust or a direct distribution from the trust. Timing is of the essence in this case: you want to act prior to a distribution to the disabled beneficiary from the trust.

Under Probate Code Section 15403, "if all beneficiaries of an irrevocable trust consent, they may compel modification or termination of the trust upon petition to the court," on the condition that a material purpose of the trust not be impaired by the termination or modification. This section permits preparation of a petition, supported by the consents of all beneficiaries, with statements relating to the settlor’s intent either incorporated in the petition or attached as declarations, pointing out that the settlor wished to provide for his or her issue in a reasonable, prudent manner, and that to make an outright gift to a child, or make a distribution to a support trust that could be considered available to the beneficiary, would thwart the intent of the settlor. The relief sought includes modification of the trust to include a special needs provision for the disabled beneficiary.

Probate Code Section 15409 permits modification of a trust "On petition by a trustee or beneficiary, . . . if, owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust." In circumstances where it is difficult to obtain the consents of all beneficiaries, one could rely upon this section alone, if it is possible to make the case that the settlor was unaware of the public–benefits status of the disabled person, or simply didn’t know that the beneficiary had become disabled, or where the disabled person became disabled under circumstances that made it difficult or impossible for the settlor to change her trust.

Some practitioners recite both code sections in support of their petitions. It usually helps, in either case, to furnish what anecdotal information is available about the settlor and the relation of the settlor to the beneficiary. Procedurally, these petitions are handled under the 17200 provisions. The advantage to proceeding this way, rather than in having the beneficiary receive the inheritance and establish a d4A trust, is that reformation of the existing trust instrument permits establishment of a third party trust for the benefit of the disabled person, with no payment requirements to the state.

Peter Stern, Esq., is an attorney in private practice in Palo Alto, CA.