In this blog post, Erin discusses the three options (Special Needs Trust, Medi-Cal Annuity, “Spend-Down” Option) when someone on government benefits inherits money, along with their disadvantages. Sometimes no perfect solution exists.
What are Medi-Cal and Supplemental Security Income (SSI)?
Medi-Cal is California’s Medicaid program that pays for a variety of medical services for children and adults with limited income and resources.
Supplemental Security Income (SSI) is a program that gives monthly income and resources to those who are disabled, blind, or over age 65.
Can inheriting money affect your Medi-Cal and SSI benefits?
The answer is yes, it will affect Medi-Cal and SSI benefits, and mostly affects individuals with special needs. If you are the recipient of government benefits, you cannot have more than $2,000 in assets ($3,000 if you’re married), and if you exceed this total it will affect your eligibility for CA government benefits. That means your Medi-Cal and SSI can be threatened.
However, there are options available to ease this worry, such as a Special Needs Trust (SNT), a Medi-Cal annuity, and the so-called “spend-down” option.
Option 1: Special Needs Trust (SNT)
The Special Needs Trust (SNT) is a trust that is set up on a person’s behalf in a legal arrangement. This special needs trust is created to aid people who want to save their government benefits, and is designed for the benefit of individuals who have a mental or physical disability, or who live with chronic illness. It will protect their assets and government benefits. It is under the control of an individual known as a trustee.
Disadvantages of the Special Needs Trust (SNT)
- A person needs to find a trustee (third party, family member) who will often decide how to proceed with the trust for their needs. The trustee will receive funds from the trust, then use them to provide for the individual’s needs and services. However, the money from the SNT cannot be used for transportation, insurance, hobby and recreation material, electronic equipment, vacations, and entertainment. If the trustee misuses the money, the government benefits will be jeopardy.
- Creating a special needs trust is not going to be easy, because you need to determine a specific amount of money to fund your loved one’s trust, which will require thoughtful planning.
- There is a monetary cost to set up the trust.
- With a first party trust, every year there is a tax filing fee to maintain the trust, which may be at a high cost.
Option 2: Medi-Cal Annuity
Some of you may want to invest in an annuity because it will provide another stream of income with your SSI, SSDI, or Medi-Cal. It will add more money to your bank account as the month allows, and it lets you spend more money for you and your needs.
The Medi-Cal Annuity allows you to not to have to incur the tax hit right away upon receipt of the money. If you take it as a lump sum, your tax burden will be high, in some cases.
Disadvantages of the Medi-Cal Annuity
- The annuity must be purchased from a commercial insurance company.
- The annuity costs a lot of money to maintain.
- The annuity is not irrevocable.
- If you die before the life expectancy in the annuity contract, the remainder of the money will go to the insurance company, or Medi-Cal.
- Your bank account can have a maximum of $2,000, and you must take into account Medi-Cal, SSI, or SSDI, and now, the annuity.
- This annuity is inflexible, as it does not plan for unforeseen circumstances.
Option 3: “Spend-Down” Option
The “spend down” option is the last one, for an individual who receives government benefits and wants to maintain government benefits but does not want to set up an annuity or special needs trust.
Let’s say that person suddenly receives money (such as inheritance) but it’s not big enough to justify a $3,000 cost of a special needs trust or to bother with an annuity. Let’s say that amount is $10,000.
This is where the “spend-down” method comes into play. The individual who receives this sum of money should have a maximum of $2,000 in bank accounts before the end of the month so they can spend about $8,000 of that money on necessities, such as a car or new furniture, etc.
Disadvantages of the “Spend-Down” Option
- The large sum of money needs to be spent within a month.
- The money is spent and there will be no future access to it.
- Impulse purchases during that month may not be wise in the long run.
- It takes time to plan and coordinate this spend-down situation, so it is smart, thoughtful and positively impactful.
Erin Bui is the Mangus Finance Circles specialist based in Riverside, CA, focused on helping special needs and senior communities with financial education and awareness.