California families that include a person with special needs, whether that person is a minor child or an adult, face unique issues when preparing an estate plan. The problem is created by the fact that a number of government programs that provide aid to persons with disabilities also have income limitations.

An outright bequest of cash or liquid assets may push the disabled person over the income limits of programs such as Supplemental Social Security, Social Security Disability Insurance benefits and programs provided by the state of California such as Medi-Cal and In-Home support Services. An effective estate planning tool that is used to solve this problem is called a “special needs trust” (SNT).

Basics of a special needs trust

The agencies that administer such programs and the Internal Revenue Service have established rules that allow a person to establish and fund an SNT without losing the benefits provided by the government aid programs.

The rules that govern qualification as an SNT can be complicated, but in essence, the trust document must establish the following limits on the use of the assets in the trust.

• A trustee must be chosen to manage the trust’s assets.
• The trust must have as its main purpose the supplementation of the support and services that the beneficiary receives from public benefits.
• The beneficiary of a special needs trust has no power to sell or otherwise dispose of the trust assets.

The assets of an SNT cannot be used to pay for food or shelter for the beneficiary. Also, the beneficiary of an SNT cannot directly access the assets in the SNT; if a healthcare provider is owed money for treating the beneficiary, the beneficiary must notify the trustee and ask the trustee to pay the provider.

Three kinds of SNTs in California

California permits three types of SNTs:

• Third party SNTs in which the trust assets are provided by persons other than the beneficiary;
• First party SNTs in which the assets are contributed by the beneficiary; and
• Pooled SNTs in which the assets in several SNTs are placed in a single trust and managed by a single trustee.

SNTs can be very complicated, and anyone considering establishing an SNT should consult an experienced estate planning attorney. A knowledgeable lawyer can provide advice on the kind of trust that would be most helpful and draft the documents necessary to properly form and fund the trust.