Special Needs Trusts



Certain types of government assistance commonly received by persons with disabilities are needs based programs. Both Supplemental Security Income (“SSI”) and Medi-Cal have an asset limit of $2,000. Often, well-intentioned parents, grandparents, siblings and other friends and relatives cause their special needs loved ones to lose these needs-based government assistance programs by leaving them unprotected inheritances.

Because  of the fear of a special needs child losing his or her SSI or Medi-Cal benefits, many well-intentioned but ill-informed parents design their estate plans to exclude the special needs loved one. They often leave a share of their estate to a sibling of the special needs loved one, with the promise from the sibling that he or she will take care of the needs of the special needs loved one. This can be a major mistake! While the sibling may have every intention of honoring his or her promise, many unforeseen circumstances can prevent this from happening. The sibling may be forced into bankruptcy, get into trouble with the IRS or have a creditor enforce a judgment and have the funds set aside for the special needs child seized. The sibling may be involved in a nasty divorce and have the family court dissipate the funds as part of the dissolution agreement. Or the sibling may become disabled or pass away, leaving the money in the hands of someone who may be unaware of the arrangement with the parents or not feel honor-bound to fulfill the promises made by the sibling.

So what is the solution? A Special Needs Trust, or “SNT” is a trust designed to preserve needs-based government assistance plans, such as SSI and Medi-Cal, for special needs beneficiaries while allowing the special needs beneficiary to receive his or her inheritance. A trustee is appointed to manage the funds for the special needs person and the inheritance can be used to pay for things not provided for by the government assistance the special needs person is receiving.

What is a Third Party Special Needs Trust?

A Special Needs Trust created by a parent or grandparent during their lifetime is known as a third party Special Needs Trust. The third party (parent or grandparent) has every right to dispose of his or her assets in any manner he or she chooses. For instance, a parent of a child with a drug addiction problem may choose to have a trustee maintain control over that child’s inheritance throughout the child’s lifetime, in order to minimize the possibility the inheritance would be used to purchase drugs and further the addiction. Or a grandparent may set aside a certain amount of funds to pay for college education for his or her grandchildren, with any remaining funds not distributed until the youngest grandchild attains age twenty-five. Because of the ability of a third party to structure his or her estate plan with any restrictions he or she chooses, it is perfectly legal to create a Special Needs Trust that specifically meets the needs of the special needs loved one, and further provides what will happen to any remaining funds in the Special Needs Trust upon the death of the special needs loved one (assuming there are funds remaining).

A third party Special Needs Trust can be a “stand-alone” trust or a testamentary trust. A stand-alone Special Needs Trust is a separate trust created during the lifetime of the parent or grandparent. Because the trust is now in existence, the parent or grandparent can begin setting aside funds while he or she is alive. Furthermore, other persons, such as grandparents, aunts and uncles, siblings and friends can contribute the Special Needs Trust during their lifetimes. They can also contribute to the stand-alone Special Needs Trust at their deaths by naming the trust as a beneficiary under their Will or revocable living trust.

A testamentary Special Needs Trust does not come into existence until the death of the parent or grandparent. It is created under parent’s or grandparent’s Will or revocable living trust. Because it does not come into existence until after death, it cannot be funded during the lifetime of the parent or grandparent. It also cannot be used to hold an inheritance from another relative or friend if that relative or friend predeceases the person creating the testamentary Special Needs Trust. If it is unlikely that anyone other than the parent or grandparent will be contributing to the Special Needs Trust, a testamentary Special Needs Trust can work very well. If many people would like to contribute to the well-being of the special-needs loved one, a stand-alone Special Needs Trust would be necessary.

Funding a Special Needs Trust

Providing for the lifetime needs of a special needs person can be extremely expensive. Life insurance is often excellent way to pay for the care of a special needs child, especially when a parent is still relatively young and has not has substantial time to save the sometimes large amount of money that would be needed to provide for the child’s needs.

A Special Needs Trust can also own the home of the parent or grandparent and thereby provide for minimal disruption of the special needs person’s life after the death of the person he or she has lived with throughout his or her life. Payment of mortgage payments, property taxes, homeowners association dues and/or utilities by the trustee of the Special Needs Trust can affect the amount of government assistance a special needs person receives. For this reason, an attorney familiar with the intricacies of special needs trusts, government assistance programs and tax law should be consulted when planning your estate plan or administering the Special Needs Trust. Often the largest asset of the estate is the residence, and while the parents want to see the residence preserved for their special needs loved one, they also want to benefit their other children at death. This requires special planning by the attorney to accomplish.

Individual Retirement Accounts (“IRAs”) and other retirement accounts quite often also comprise a large portion of an estate. Naming a special needs person as the beneficiary of an IRA or retirement account is not usually a good idea. While naming the Special Needs Trust can be a better idea, there are numerous income tax, estate tax and non-tax considerations that should be reviewed before doing so. Should you have a large IRA or other retirement asset, we strongly recommend you consult with one of our tax attorneys at Dennis M. Sandoval, A Professional Law Corporation prior to designating a beneficiary for your retirement assets.

What is a First Party Special Needs Trust?

Sometimes a special needs person comes into money unexpectedly. The special needs person might receive a litigation award, win the lottery or receive an inheritance that unprotected by a third party Special Needs Trust. This infusion of assets will cause the special needs person to lose eligibility for need-based government assistance. If the amount received is large enough, the loss of government assistance may not be catastrophic. But if the special needs person relies of Medi-Cal for health insurance coverage and the infusion of assets is not substantial, the special needs person can be left scrambling for a solution. In these cases, a first party Special Needs Trust can be a god-send. A first party trust is a special type of trust authorized under federal law at 42 U.S.C. § 1396p(d)(4)(A). Because of the source of the money being transferred to them, they are sometimes referred to as Litigation Special Needs Trusts or (d)(4)(A) Trusts. These trusts allow the special needs person to retain the inheritance, lottery winnings or litigation award while also retaining his or her government assistance. A (d)(4)(A) Trust can only be created by a parent, grandparent or guardian of the special needs person, or by the Probate Court.

Our office works with many litigation attorneys, settlement brokers and financial planners to create Litigation Special Needs Trust to preserve the government assistance received by their clients after the client receives a large personal injury or malpractice award. The sooner we get involved in the process, the better, as we can often assist with getting the injured client on SSI or Medi-Cal, with developing a litigation or settlement strategy based on our input as to the type of long term care the client will need, and by assisting the litigation attorney in reducing any liens against the lawsuit proceeds imposed by Medicare or Medi-Cal.

While first party Special Needs Trusts can be very valuable, one downside is that any funds remaining after the death of the special needs person must be used to replay the State of California for any medical payments made by Medi-Cal during the special needs person’s lifetime. Because of this major downside, we strongly advise our clients who are parents of a special needs child to create a third party Special Needs Trust while they can still do so.

What is a Pooled Trust?

A Pool Trust is another type of first party Special Needs Trust which is authorized under federal law at 42 U.S.C. § 1396p(d)(4)(C), These Special Needs Trusts are created by charitable organizations that work with the disabled. The charity acts as trustee of the Pooled Trust and the money contributed to the trust is “pooled” for investment and safekeeping purposes, but accounted for separately for each beneficiary by the trustee. If there are any funds remaining after the death of the special needs person, the remaining funds are paid to the charity to assist it in accomplishing its charitable mission.

Pooled Trusts can be very useful alternative to a (d)(4)(A) first party Special Needs Trust when the amount received by the special needs person is not substantial and/or there are no persons available to serve as trustee. They are also appropriate where the special needs person and/or his or her family have a strong desire to benefit the sponsoring charity.

The following are Pooled Trusts in California with which our law firm has had some experiences, good and bad. Call Mr. Sandoval for more details if you desire them.

The Master Trust is a Pooled Trust created and managed by the Inland Regional Center for persons who are developmentally disabled. While the Master Trust should definitely be considered when evaluating Pooled Trust options, the attorneys at our law firm and other attorneys throughout California who specialize in planning for persons with special needs have been very disappointed with some of the inaccurate information promulgated by the Inland Regional Center and other Regional Centers regarding the use of third party Special Needs Trusts as well as the availability of other Pooled Trust options in addition to the Master Trust. We strongly discourage any parent from designating the Master Trust to receive the inheritance of their special needs child without first exploring the possibilities of creating a third party Special Needs Trust as part of your estate plan and/or comparing and contrasting the structure and administrative history of the Master Trust with those of the other Pooled Trusts designated above.