Special Needs Trusts: What Happens When You Ignore Special Needs Planning

Another example of the importance of special needs trusts.  I was contacted about a client with an all-too-common issue. A lady died several years ago without a will.  At the time of her death, she owned a home that had been severely damaged by Hurricane Katrina.  The home was uninsured and ineligible for FEMA assistance. As a result, the house is in a state of extreme disrepair. The home is virtually unsellable in its current condition, especially in this market.

The lady left five children, one of whom is disabled and received social security benefits.  When the Social Security Administration learned about the home that his mother had owned, the son’s SSI benefits were terminated.  SSA’s position is that non-cash assets are treated as income if the person who receives it has “the legal right, authority, and power to convert it to cash (by selling it, for example).”

The earliest point at which inherited property other than cash can be used to meet food, clothing, or shelter needs is the point at which State inheritance laws permit the heir to convert the property (or his or her interest in it) to cash.

In some States, an heir cannot dispose of an inheritance until the estate is closed. When this is the case, the inheritance does not meet the regulatory criteria to be considered income until the estate is closed. In other States, an heir may receive a contingency interest in real property at the time of the decedent’s death. The heir can sell this contingency interest immediately, even though perfect title to the property cannot be conveyed until the estate is closed and the value of the property may be reduced accordingly or be difficult to determine. However, when the contingency interest can be valued, this interest meets the regulatory criteria to be considered income at the time of the decedent’s death.

Since State law governs the point at which inherited property first meets the regulatory criteria for being considered income, State law must be taken into account in determining the point at which inherited property becomes income under the SSI program. This includes cases in which State law permits an heir to convert inherited property to cash prior to distribution of the assets, since failure to consider such property as income unless and until the assets are distributed would not be consistent with regulations.

This happened to be a Mississippi resident. As I’ve written before, Mississippi law provides that real estate passes to a person’s heirs under the laws of intestate successionat the moment of death. Although the owner doesn’t have clear or marketable title that most buyers would accept in an arm’s length sale, the owner is nonetheless the rightful owner.  Mississippi probate is required to clear title and prove that the person is the rightful owner, but the actual change in ownership occurs at the moment of death.

So what does that mean in this situation? Most likely, it means that the son will be disqualified from his governmental benefits. This would be bad enough if the son was actually left cash.  This cash would have unnecessarily been paid for his care (because it would have replaced benefits that the government would have otherwise paid for), but at least he would have had a means to pay for his care.

In this situation, however, there isn’t any money to pay for his care. He only has a 1/5 interest in a dilapidated house that is unmarketable. He couldn’t sell the entire property to a buyer without the consent of all of his siblings and without probating his mother’s estate.  No reasonable buyer would accept it.  Much less would a buyer accept his 1/5 interest in the property.  He simply has no practical way of converting the 1/5 interest in the property into cash in order to pay for his care.

This could have been easily avoided if his mother had done some planning before her death. She could have either disinherited this son in her will (so as not to disqualify him from his governmental benefits) are, more likely, have included a special needs trust that would have helped with her son’s care without disqualifying him from SSI.  Given the financial and emotional costs of not planning in this situation, there’s really no excuse for not putting something in place.

I am amazed at how many people are unaware of this issue. I talk to people with severely handicapped children who either don’t have a will or have a will with generic language that splits their property among their children.  The problem is that they don’t know of this mistake until too late.  Maybe that’s the fault of the legal profession for not educating the public about the need for special needs planning.  But I think most people know that they need some sort of estate plan (at least a will). Any competent estate planning attorney could spot this sort of issue and help avoid this result. If you have a family member that is receiving or could receive governmental benefits, be sure to talk to an estate planning attorney as soon as possible.

View more from Jeramie Fortenberry

About Jeramie Fortenberry

I am an attorney
practicing trust and estate law in Mississippi, Alabama, and Florida. I
offer free telephonic consultations to clients with questions about
probate and estate planning. Get yours today.


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