The information on this page is intended as a general introduction to Special Needs Trusts. Setting up these trusts can be a complicated process, and families who think they need such an estate planning arrangement should consult an attorney with experience preparing Special Needs Trusts.
What are Special Needs Trusts?
Many people with special needs, such as mental health disabilities, are eligible to receive financial assistance from the government through programs such as Supplemental Security Income (SSI), Medi-Cal (Medicaid), HUD Section 8, In Home Support Services and CalFresh. These government financial aid plans are based on financial need and have strict income eligibility requirements, however. If the person receives a large amount of money (from an inheritance for instance) they can be disqualified from these needs-based programs. For the family members of a special needs individual, careful estate planning is essential to preventing such an outcome.
A Hypothetical Example: A couple has three adult children who will divide a $600,000 estate after both parents have died. One of the children is receiving SSI and Medi-Cal benefits due to a mental health disability. This child has problems managing money, so the parents are Representative Payees for the Medi-Cal benefits. If the couple sets up a traditional will or trust distributing everything equally among their children, their disabled child will likely encounter major financial issues. He or she will inherit approximately $200,000: assets far above the limits set by SSI and Medi-Cal. They will be disqualified from those aid programs and receive no further benefits. Once the child spends their inheritance, not only will they have no assets, they may also have a hard time getting back onto SSI and Medi-Cal.
The purpose of a “Special Needs Trust” is to preserve government benefits for disabled beneficiaries. Instead of leaving assets directly to the disabled adult child, the parents could establish a “Third Party Special Needs Trust” in their living trust or wills. This trust would not be under the control of the child, who would not be able to revoke it and use the assets for their own purposes. The trust would be managed an independent trustee named by the parents and would continue for the lifetime of the child. (This is known as a “Third Party Special Needs Trust” because the beneficiary has no control over the trust.)
This type of trust prevents the beneficiary from controlling their inherited assets, but also provides a means of continuing to financially support the disabled family member. The trust can own assets that are used but not “owned” by the beneficiary, so they do not count against needs-based government assistance. Note that a trustee would not want to give cash directly to the child, as such payments would be counted as income against SSI/Medi-Cal, but they can pay for expenses such as utilities, transportation, education, recreation, etc. The trust may pay for food and rent (or own a home in which the beneficiary resides), although paying for such “basic needs” will trigger a reduction in SSI benefits. Assets owned by the trust can include money, property, stocks and bonds, child support, and monetary legal settlements, and other family members and friends can also contribute money and assets to the trust.
For more information on Special Needs Trust funds in California, see Building Your Assets and Wealth: The Details by Disability Benefits 101, or contact an attorney who specializes in this practice area.