Special needs trusts are an estate planning device that allows a person to leave part of his or her estate to a disabled beneficiary without affecting that beneficiary’s government benefits. For example, let’s say you have an adult child who is permanently disabled and receives Social Security and California Medicaid (Medi-Cal) benefits. Leaving that child a large inheritance might disqualify them from continuing to receive those benefits. And if the child’s disability renders them unable to handle their own finances, any inheritance you leave them may simply be squandered.
A special needs trust addresses this situation by distributing assets from your probate estate (or existing living trust) to a trustee, who could then make payments for the benefit of the disabled child-but not to the child directly, as that would constitute income for Social Security and Medi-Cal purposes. The special needs trust would continue for the duration of the child’s lifetime. Like most trusts created as part of an estate plan, the special needs trust would become irrevocable upon your death, meaning your child or the successor trustee could not unilaterally modify or revoke it.
A special needs trust is usually the best way to provide for a disabled child in your estate plan. If you think a more informal arrangement might suffice, consider a recent decision from the California Court of Appeals. In this case, which is described here for informational purposes only, a father decided to leave his entire estate to one daughter with only an oral promise she would provide for her disabled sister after his death.
Kalfin v. Kalfin
Harry Kalfin was a successful engineer and real estate investor who died in 2010 leaving a trust estate worth approximately $3 million. Kalfin had two daughters Debra Kalfin and Judith Kalfin, both in their 50s. Debra Kalfin has been on permanent disability since 1987 due to diabetes and other health problems.
Harry Kalfin initially signed a living trust in 2002 providing for an equal distribution of his estate between his two daughters. But in 2009, concerned about Debra Kalfin’s inability to handle money, Harry Kalfin amended the trust to leave all but $1,000 to Judith Kalfin. But Harry made Judith promise, on multiple occasions, to “take care of her sister.” Judith Kalfin told a friend, who happened to be a Los Angeles Superior Court judge, that she “acknowledged her promise to her father to support Debra.”
But after Harry Kalfin’s death, Judith Kalfin disavowed any obligation to support her sister. Debra Kalfin then sued her sister for breach of contract and financial abuse of a dependent elder. A jury ruled mostly in favor of Debra Kalfin, awarding her $1.4 million in economic damages and an additional $260,000 in punitive damages. The appeals court affirmed the verdict.
It’s important to understand this was not a probate case. Probate matters in California are not tried before a jury. Debra Kalfin did not contest the terms of her father’s trust, but rather her sister’s failure to carry out the terms of a binding oral contract with their father. As the appeals court observed, “Here, in exchange for her father leaving his entire estate to her, Judith promised to take care of her disabled sister’s financial needs. ”
Was a Special Needs Trust the Answer?
For some reason, Harry Kalfin chose not to provide for Debra Kalfin with a special needs trust. There was, in fact, standard language authorizing the creation of such a trust in Kalfin’s original living trust, but witnesses testified in court that he never discussed utilizing the provision. (The trial jury actually asked if it could create a special needs trust in awarding damages, but the judge explained that was not appropriate in a non-probate case.)
Special needs trusts are not appropriate in all cases where a beneficiary is disabled. If the disability is temporary-which was not the case with Debra Kalfin-you may not wish to use a special needs trust, as it cannot be easily revoked should the disability be removed. As with all such matters, you should consult with an experienced San Diego estate planning attorney who can advise you on the best course of action. Contact the Law Office of Scott C. Soady today if you have any questions.