Spousal Special Needs Trusts

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When a spouse is disabled and has qualified to receive Medi-Cal (California’s Medicaid program), what happens if the “well” spouse dies first?

Medi-Cal is a “needs based” program. That means there are strict income and asset requirements. A person applying for and receiving Medi-Cal must have less than a $2,000 monthly income and less than $2,000 in assets.

The problem is if the “well” spouse dies first and leaves their assets to their spouse, if the “inheritance” is more than $2,000, it would disqualify the disabled spouse from receiving benefits until the inheritance is spent.

There is a solution. A Special Needs Trust can be created to hold the inheritance for the spouse. This type of trust is officially called a third party special needs trust. They are often established by the family of a disabled person to provide a fund to improve the life of the disabled person over what is provided by governmental benefits.

There are important limitations on who can manage the money and how it can be spent, but properly planned a third party special needs trust can greatly improve the life of a person who is living on governmental benefits due to a disability.

When a third party special needs trust is created by one spouse for another, there are additional requirements. Federal law prohibits a spouse from creating a third party special needs trust for the other through the family trust. (Which is typically how third party special needs trust are created for anyone other than a spouse.) In order to create a third party special needs trust for your spouse, you must do so in your Last Will and Testament, creating a testamentary trust.

Your estate planning attorney should create a Living Trust with a “reverse” pour-over along with a companion testamentary trust to protect their spouse’s right to continue to receive Medi-Cal benefits.

A Living Trust is typically the centerpiece of a family’s estate plan. However, when one spouse is receiving Medi-Cal benefits, it is very important to follow the laws carefully to protect those benefits. Therefore, we recommend working with a qualified elder law and Medi-Care planning attorney to help your family.

If you have questions, please contact Thatcher | Law to learn more about how to protect your family’s assets in the event one spouse needs long term care.