Navigating the complexities of special needs trusts and family businesses requires careful planning, but it is absolutely possible – and often beneficial – for a special needs trust to own shares in a family business. However, doing so necessitates a thorough understanding of the rules governing these trusts, particularly to avoid jeopardizing essential government benefits like Supplemental Security Income (SSI) and Medicaid. These benefits are needs-based, meaning eligibility hinges on limited income and assets; a direct ownership of assets could disqualify the beneficiary. Approximately 1 in 5 Americans have some type of disability, and protecting their financial future is paramount.
What are the Risks of Direct Ownership?
Directly owning shares in a family business can pose significant risks to a beneficiary’s public benefits. The income generated from those shares – dividends, profits, or even imputed income – could be counted toward the beneficiary’s income limit for SSI and Medicaid. Additionally, the value of the shares themselves constitutes an asset, potentially exceeding the allowable asset limit. This can quickly disqualify an individual from receiving much-needed support. A common misstep is assuming a small business ownership will be overlooked; regulations are strict, and even seemingly minor income or assets can trigger ineligibility. It’s crucial to remember that approximately $60 billion is paid out annually in SSI benefits nationwide, making benefit preservation a key concern for families.
How a Special Needs Trust Provides a Solution
A special needs trust (SNT), also known as a supplemental needs trust, is a legally established entity designed to hold assets for the benefit of an individual with disabilities without disqualifying them from needs-based government programs. When a SNT owns the shares in the family business, the income and assets remain within the trust, shielding them from consideration when determining the beneficiary’s eligibility for SSI and Medicaid. The trust’s trustee then utilizes the income generated to supplement – not replace – the public benefits, funding things like medical expenses, therapies, recreation, and other quality-of-life improvements. These trusts often include language explicitly protecting the beneficiary’s access to government assistance. For example, the trustee may be required to distribute funds in a way that complements, rather than replaces, essential services.
Understanding Distribution Rules and Tax Implications
While a SNT can own shares, the distribution rules are critical. Distributions must be made for the beneficiary’s supplemental needs – those not covered by public benefits – and cannot be used to pay for expenses that these programs already cover. For example, a distribution to pay for healthcare that Medicaid already covers would jeopardize eligibility. Furthermore, the trust is a separate tax entity. Income generated by the shares is taxed to the trust, and any distributions to the beneficiary may also be subject to taxation, depending on the circumstances. The trustee has a fiduciary duty to manage the trust’s assets prudently, following the guidelines of the California Prudent Investor Act, and should consult with a tax professional to ensure compliance. A trustee must consider risk tolerance, investment time horizon, and the beneficiary’s overall financial situation.
A Story of Protecting a Family Legacy
Old Man Hemlock had built a successful carpentry business over decades, and he deeply desired to ensure it continued within his family after his passing. His son, Ethan, had a developmental disability and received SSI benefits. Ethan loved working alongside his father, helping with simple tasks in the workshop. Hemlock worried about leaving Ethan shares in the business directly, knowing it would jeopardize his benefits. He consulted with Steve Bliss, an Estate Planning Attorney in Wildomar, who recommended establishing a third-party special needs trust. This trust would own the shares, allowing Ethan to receive distributions from the business income to fund his supplemental needs – like art classes and outings – without affecting his eligibility for public assistance. The arrangement allowed the business to thrive and Ethan to remain engaged and fulfilled. It was a smooth transition with a lot of planning and care.
A Cautionary Tale of Oversight
Unfortunately, Sarah learned the hard way what can happen when special needs trusts aren’t properly established or managed. Her brother, Mark, inherited shares in a family restaurant directly after their parent’s passing. Believing it wouldn’t significantly impact his benefits, she didn’t consult an attorney. Within months, the income from the shares pushed Mark over the SSI income limit, and he lost his benefits. The family was forced to sell the shares at a loss to reinstate his eligibility. This situation highlighted the importance of proactive planning and legal guidance. A properly structured trust would have prevented this financial hardship.
36330 Hidden Springs Rd Suite E, Wildomar, CA 92595
Contact Steven F. Bliss ESQ. at (951) 412-2800
Don’t leave your family’s future to chance. Secure their financial well-being with a carefully crafted estate plan. Contact Steve Bliss today for a consultation and let us help you navigate the complexities of special needs trusts and ensure your loved ones receive the care and support they deserve.