Special Needs Trusts

In essence, special needs trusts preserve an individual’s eligibility to receive public benefits such as MediCal, Medicare, and SSI. Eligibility for these services and other public benefits is often determined by the amount of a person’s “countable” assets. Generally, assets held in a standard revocable living trust or a person’s name individually are considered “countable” assets for purposes of calculating a person’s eligibility for public benefits. If a person’s total assets and income exceed a low threshold amount, this will often disqualify them from receiving some or all available public benefits.

If a person who is already receiving public benefits receives a large sum of money – usually an inheritance or a settlement from a personal injury action – this may automatically disqualify that person from receiving ongoing public benefits. This is why careful special needs trust planning is so important.

Although the name implies otherwise, special needs trusts are not only for individuals with special needs, though beneficiaries are often severely disabled or otherwise unable to generate any significant income. A special needs trust is a special kind of trust that, by design, is not considered a “countable” asset for purposes of calculating an individual’s eligibility for public benefits. This means that a person may continue to preserve their eligibility for any public benefits, while still having the balance of the special needs trust from which to use for certain expenses.

Types of Special Needs Trusts

There are two main kinds of special needs trusts – first party and third party.

A first party special needs trust is a special needs trust funded by a court order from funds to which the beneficiary is entitled. The most common example of a first party special needs trust is a special needs trust established through a court order in a personal injury action, where the trust is funded with the proceeds of a personal injury settlement or judgment and never transfers to the beneficiary individually.

A third party special needs trust is a special needs trust funded with funds from a third party (such as a parent or relative) that does not require establishment by a court order. The most common example of a first party special needs trust is an estate plan of a parent or family member which establishes a special needs trust for a beneficiary in lieu of an outright distribution to that beneficiary.

Limitations on Special Needs Trust Use

There is a major caveat to the use of funds held in a special needs trust. Certain expenses, if paid from the special needs trust, will qualify as income to the beneficiary and thereby affect their eligibility for public benefits. For example, except for very limited circumstances, the balance of a special needs trust cannot be used for certain essential needs, such as food and rent, but may be used for other essentially needs, such as medical expenses and clothing. Because of the limitations on how trust funds can be used, you should consult with an attorney to be fully informed on the benefits and limitations if you think a special needs trust may be an option for your family.

A special needs trust may be appropriate for your family if any of the following apply:

     ○     You have one or more children with limited income for whom you would like to consider establishing a special needs trust upon your passing.

     ○     You or a client or loved one will be receiving a large settlement or judgment from a personal injury action and you want to understand your options for the proceeds.

Resources

For more information, visit the following webpages about Special Needs Trusts.

     ○     Social Security Administration, Program Operations Manual System (POMS) at https://secure.ssa.gov/apps10/.

      ○    Department of Health Care Services, Special Needs Trust at https://www.dhcs.ca.gov/services/Pages/Special-Needs-Trust.aspx.

      ○    Special Needs Alliance, Trustee Handbook at https://www.specialneedsalliance.org/wp-content/uploads/2021/03/SNA-2021-Handbook.pdf.