Fundamentals of Special Needs Trusts - Inheritance & Lifetime Gifting; Redirecting Inheritance into a First-Party SNT

1-3 Fundamentals of Special Needs Trusts § 3.03

Inheritance & Lifetime Gifting

Redirecting Inheritance into a First-Party SNT

The SNT attorney may be faced with a situation where a decedent leaves a bequest to an individual with a disability not understanding the adverse impact the gift will have on that individual. In these cases, depending on state law, it may be possible to redirect or divert the inheritance into a SNT. In such cases, since inheritances vest under common law at the moment of death,1 such a gift becomes the property of the recipient and any SNT created in these circumstances becomes a first-party SNT subject to estate recovery claims on the death of the beneficiary or earlier termination of the SNT. See § 11.09. If the inheritance can be redirected into a SNT, the current benefits of the individual will not be affected.

If the intended SNT beneficiary is under an existing conservatorship or guardianship a petition for substituted judgment can be brought establishing the SNT and directing the guardian or conservator to deposit the inheritance into the SNT. Since the SNT in this instance would be created by a judicial proceeding resulting in a court order creating the SNT, the resulting SNT satisfies the requirements of 42 U.S.C. § 1396p(d)(4)(A). Form 3.203 is a sample petition.

Another approach used frequently in California, where the individual with a disability has capacity and is not under a conservatorship, is for the individual to execute a limited durable power of attorney authorizing the agent under the power to draft a SNT for the benefit of the individual and then file a petition for confirmation of the agent's act under California's Probate Code and a court order establishing the SNT. Done this way the court order ratifying the agent's act and ordering the creation of the SNT should act as an order for purposes of 42 U.S.C. § 1396p(d)(4)(A). Note that the agent is not creating the SNT and seeking ratification of her actions in doing so. While that might result in a court order ratifying the existence of the SNT created by the agent, it would not constitute a SNT created by court order as required by the Statute.2

This free download is part of Fundamentals of Special Needs Trusts, which places special needs trusts in the arsenal of tools available to an attorney to help his senior clients and those who have disabilities. It helps the practitioner to understand how she can draft a trust, using the person's own funds or the funds of another, to provide goods and services for those clients that will enhance their everyday existence.

Fundamentals of Special Needs Trusts provides practitioners with analysis of the law, authoritative advice, practice notes, checklists, and forms. It begins with a discussion of the history of special needs trusts, discusses ethical issues, explains the various types of special needs trusts and how to draft, fund, and administer those trusts, how and when to terminate them, and the relevant tax considerations.

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[1] See, e.g., Kingsbury v. Scoville's Admin., 26 Conn. 349 (Conn. 1857).

[2] See Cal. Probate Code § 4541 and POMS SI 01120.203g.