By Moryt Milo
For parents whose children have mental health conditions, the question of who cares for them once they are gone is ever present.
Mark Gilfix, a partner at Gilfix & La Poll Associates and an expert in special needs planning, said this fear can be abated with the right tools. Once established, these tools provide a powerful, life-long safety net for those children.
“There is so much we can’t control,” he said, “but let’s understand the financial and legal tools we have that anyone can put into place.”
These tools are there for any loved one with a mental illness diagnosis—a sister, brother, niece, nephew, or grandchild. The key is the diagnosis. Once someone is diagnosed with a severe mental illness that prevents a person from full-time gainful employment, the world around that family goes through a tectonic shift.
“Suddenly you have to think decades ahead and make sure your loved one is taken care of,” Gilfix said. This is when a Special Needs Trust comes into the picture. “It is one of the most important documents you’ll ever sign to protect your child or loved one.”
This document, which is a third-party Special Needs Trust, is designed to hold assets for the benefit of a disabled person without disturbing public benefits such as Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), Medicare, or Medi-Cal.
How does this work?
For a Special Needs Trust to be effective, it must be irrevocable, which means it cannot be changed once there is money in it, and it must be managed by a third party.
A Special Needs Trust has two major purposes when the caregivers are gone.
- No matter how much money goes into this trust, whether it’s $100,000 or millions, it will not affect the individual’s public benefits. Currently, if an individual has assets greater than $2,000, that person loses their SSI or Medi-Cal benefits.
- It also manages those assets through a third party. Individuals with a severe mental illness often have difficulty with finances and daily management. This ensures funds are spent in a responsible manner.
“It can be you managing everything when you are alive,” Gilfix said. “But then [you] name a third party to make sure [upon your death the funds] are invested well, deployed properly, and that it lasts as long as possible for your child.”
A Special Needs Trust, which is a supplemental trust, is not something that is created in a vacuum. It’s part of a more comprehensive asset plan. The family needs three other documents: a
Living Trust, Power of Attorney, and Advance Healthcare Directive. These documents make sure that if caregivers become unable to care for themselves, proper instructions are in place to take care of them and their loved ones through the Special Needs Trust.
“If you are out of it, who is going to step in and manage your assets and the day-to-day business of life issues,” Gilfix said. “If your child is over 18, who will be authorized to take care of your child if you can’t take care of him yourself?”
Choosing the trustee
Even though a Special Needs Trust is irrevocable, until it is funded you can make changes such as who will be responsible for managing the day-to-day needs and financial aspects of this trust.
Life can change dramatically in the future, and families are being asked to look years ahead and make difficult decisions. Who will be the trustee? Will it be a sibling, another family member, close friend, third party like a fiduciary, attorney that specializes in this area, or a bank. Gilfix said there is no perfect answer. Things can change down the road and who serves in this future capability can be revised.
“This is a pivotal, critical decision, “Gilfix said. “After I am gone, who is going to manage this for my child.”
In addition to the trustee, the question is whether the trust has enough assets to last throughout the child’s lifetime. One tool that Gilfix suggests is life insurance and assigning the Special Needs Trust as the beneficiary to provide liquidity.
Where your child lives
In 2020, a significant law was passed, Prop 19, which changes the dynamics of children living in the home owned by the parents. Prior to this law, upon the parents’ death, a home or rental property could go directly to the children and the tax base stayed the same. Prop 19 changes this.
- If the children are not moving into the family home, the property is immediately reassessed at current market value. Rental property is also reassessed at market value.
- If the child moves into the home within a year after the parents die or is living in the home, the first one million is protected under the original property tax level, but the difference is reassessed at fair market value. This means taxes can suddenly balloon into the thousands. This could force the trustee for the Special Needs Trust, if it owns the property, to sell and find another place for that child already struggling with a mental illness to live.
Gilfix’s firm has developed tools to help address the problem, depending on the family’s circumstances, to enable a child to stay in the home.
Other benefits
A Special Needs Trust is a flexible tool. It can hold a home, investments, or stocks. The money in the trust can pay a mortgage, rent, entertainment, food, clothing, medical needs, and more.
Another important reason to leave money to a child in a third-party Special Needs Trust is when that child dies any remaining assets in that trust can be designated to another family member.
Gilfix points out that it’s important for other family members or friends to make sure any inheritance they plan to leave this child is assigned to the Special Needs Trust and not directly to the person.
Should an inheritance come directly to that individual, the individual could create a first-person Special Needs Trust, which would save the public benefits. But upon death, the money would go to the state.
“There is so much we can’t control,” Gilfix said. “Let’s take action and do what we can to protect our legacy and most importantly protect our next generation—our son or daughter, grandson or granddaughter we are worried about.”
To watch the complete presentation on YouTube, click here.
