Disinheriting a Disabled Beneficiary in California

Disinheriting a Disabled Beneficiary in California – a Valid Estate Planning Strategy       

By Attorney Paul Hanks, Ironclad Living Trusts in California

You have two loving adult children who you want to leave your estate to under a living trust but sadly one is disabled. How should you handle the possible inheritance that will come due a disabled beneficiary upon your death?

If your disabled adult child is reliant on government benefits on account of that disability, a complicated, very expensive and difficult to administer Special Needs Trust is an option. There is an alternative option for dealing with an adult disabled child under your estate plan and that entails actually disinheriting the disabled child. Yes, I can see that you have now fallen off your chair, and thus as a trust and estate planning lawyer please allow me to comment on the strategy of omitting a disabled beneficiary from your estate by way of a disinheritance strategy that could actually save your estate seemingly endless work, frustration, audits, trustee fees, attorney fees, and accounting costs. 

The strategy of disinheriting a disabled beneficiary begins with an examination of the shortcoming and failings of a Special Needs Trust. The biggest error people make who create a Special Needs Trust is appointing a family member as the trustee. While a trusted family member may be fine for the job of a successor trustee under the ordinary Revocable Living Trust, a Special Needs Trust is as complex as a Revocable Living Trust is not. 

The creation of a Special Needs Trust is very involved and mandates strict and unwavering compliance with state and federal law. The Special Needs Trust often draws IRS scrutiny and results in audits of the trust and the activities of your trustee. An accountant must be retained for the preparation and filing of trust tax returns. A segregated bank account is required for a Special Needs Trust. Unlike the typical family revocable living trust, there are multiple federal and state laws which impose meticulous expense tracking requirements on the trustee under a Special Needs Trust. Further, the trustee under a Special Needs Trust often innocently misapplies trust funds without even realizing they committed an error until it is later discovered in an audit.  

Accountings under a Special Needs Trust are also very complex and upon audit are often determined to be inadequate. If you have not named a professional fiduciary or estate planning law firm as the trustee under a Special Needs Trust, the chances of a very painful and costly audit are significant. Layperson trustees attempting to administer a Special Needs Trust are wading through a landmine fraught with the potential for missteps. Notably a Special Needs Trust must be assigned a federal tax ID number and thus clearly is on the radar screen of the IRS. 

Disinheriting a disabled beneficiary averts all of the foregoing risks. Of course the right circumstances must be present to do so, and the disinheritance strategy may not be prudent. Many factors come into play in deciding whether or not to disinherit a disabled beneficiary. These factors include the disabled beneficiaries age, condition, date of onset of the disability, the nature and extent of the disability, limitations, functioning, mental capacity, as well as other factors. The decision to possibly disinherit a disabled beneficiary is complex and should only be considered by consulting with an experienced estate planning law firm.  

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