Special Needs Trusts: What You Should Know

When it comes to estate planning, ensuring the future security and well-being of a loved one with special needs requires thoughtful and careful planning. At The Dayton Law Firm, P.C., we specialize in creating tailored estate plans that include provisions such as Special Needs Trusts (SNTs). 

These trusts are essential tools in planning for special needs, as they help maintain the beneficiary’s eligibility for public assistance benefits while providing financial support that doesn’t compromise these benefits. Here’s what you need to know about Special Needs Trusts and how they can be a critical part of your estate planning if you are caring for a loved one with disabilities.

What Is a Special Needs Trust?

A Special Needs Trust, also known as an SNT, is a specific type of trust designed to hold assets for a person with disabilities without affecting their eligibility for means-tested government programs such as Medicaid or Supplemental Security Income (SSI). The trust is managed by a trustee who disburses payments for expenses that enhance the quality of life for the beneficiary, such as education, recreation, counseling, and medical attention beyond the basics covered by public assistance.

The core idea behind an SNT is to provide financial support without disqualifying the beneficiary from receiving necessary government benefits, which often provide for basic needs like medical care and housing.

How Do Special Needs Trusts Work?

A special needs trust is set up by a grantor, who funds the trust with assets meant for the benefit of the disabled individual. A trustee, who can be a family member, friend, or professional, manages the trust. This trustee ensures that the distributions from the trust do not interfere with eligibility for public benefits.

The trustee has the authority to make disbursements for the benefit of the disabled individual, which can include expenses like education, health care not covered by public assistance, personal care attendants, and recreational activities. The trustee must be careful with disbursements to ensure they do not affect the beneficiary’s eligibility for public benefits. Typically, the trustee can pay for goods and services directly to providers rather than giving money to the beneficiary, which could potentially disqualify them from receiving benefits.

The assets in an SNT can come from various sources, including:

  • Direct contributions from family members or friends,
  • Proceeds from a life insurance policy,
  • Inheritance funds directed through a will,
  • Settlements from personal injury claims.

Types of Special Needs Trusts

In California, there are primarily three types of SNTs:

  1. First-Party Special Needs Trusts: These are funded with the beneficiary’s own assets, typically received from an inheritance, personal injury settlement, or similar sources. This trust type is especially useful for individuals who acquire assets that would otherwise disqualify them from receiving public benefits.
  2. Third-Party Special Needs Trusts: Funded by someone other than the beneficiary, such as parents or other family members planning for the future of a child with disabilities. These trusts are not subject to the same payback requirements as first-party trusts, where the state must be reimbursed for the cost of care upon the beneficiary’s death.
  3. Pooled Trusts: Managed by nonprofit organizations, these trusts pool the resources of many beneficiaries, and each maintains a separate account within the larger trust. This type of SNT can be beneficial for smaller estates or when a suitable individual trustee is not available.

The differences between these trusts can substantially alter how well they help the beneficiary. It’s crucial to work with an experienced estate planning attorney to ensure your trust accomplishes your goal of supporting your loved one. 

When to Use a Special Needs Trust

Special Needs Trusts are appropriate when a person with disabilities requires long-term financial support that will not jeopardize their access to essential government assistance. Situations that commonly call for the creation of an SNT include:

1. Receiving an Inheritance

If a person with disabilities is set to receive an inheritance directly, this influx of assets could disqualify them from receiving means-tested government benefits. A third-party SNT can be established by the family members or through a will to receive the inheritance, thus not affecting the beneficiary’s eligibility for public benefits.

2. Acquiring a Settlement from a Lawsuit

Similar to an inheritance, receiving funds from a lawsuit—especially those related to personal injury—can jeopardize a beneficiary’s eligibility for public assistance programs. A first-party SNT can be established to hold these funds, which allows the beneficiary to retain their benefits while still being able to use the settlement for additional care and services not covered by government programs.

3. Preservation of Government Benefits

Individuals with disabilities often rely on public benefits for basic needs and medical care. Accumulating personal assets above a certain threshold (typically $2,000 for individuals) can make them ineligible for these benefits. An SNT allows for the holding and management of assets in a way that does not count towards this threshold, preserving benefit eligibility.

The trust must be carefully administered to ensure that disbursements do not count as income to the beneficiary. Properly structured distributions from the trust can pay for the following:

  • Medical and dental expenses not covered by Medicaid
  • Education and job training
  • Personal care attendants and rehabilitation
  • Transportation and vehicle modifications
  • Recreational and cultural experiences

These expenses enhance the beneficiary’s life without risking their essential public benefits.

4. Management of Gifts or Donations

Gifts from family or donations from community members intended to help a person with disabilities can inadvertently cause financial complications regarding benefit eligibility. A third-party SNT can be set up to receive these gifts or donations, ensuring they do not impact the individual’s eligibility for government assistance.

5. Long-Term Financial Planning

Parents, grandparents, or guardians looking to secure the long-term financial stability of a child or dependent with disabilities face unique challenges, particularly around ensuring continuous care after their own passing.

An SNT serves as a central part of an estate plan, providing for the disabled individual’s needs in a way that supplements, but does not replace, their government benefits. This can include specialized medical equipment, personal care attendants, educational opportunities, and other life-enhancing services.

6. Ensuring Quality of Life

Beyond basic needs, enhancing the quality of life for someone with disabilities often involves expenses that public benefits do not cover.

Funds from an SNT can be used for personal care attendants, out-of-pocket medical expenses, education, transportation, and even recreational activities, all without risking the loss of basic support provided by government programs.

Establishing an SNT involves careful consideration of the individual’s current and future needs, potential sources of income, and the impact on eligibility for public assistance. Legal guidance is essential to navigate the rules and ensure that the trust is set up effectively to meet both legal requirements and the beneficiary’s needs.

Incorporating an SNT Into Your Estate Plan in California

Incorporating an SNT into your estate plan requires understanding your loved one’s financial needs, potential eligibility for public benefits, and the specific rules that govern these trusts in California. Here are the steps to include an SNT in your estate planning:

  1. Consult with a Specialized Attorney: Engage an attorney who has expertise in disability planning. At The Dayton Law Firm, P.C., we have the knowledge and experience to guide you through the specifics of California laws regarding SNTs.
  2. Determine the Appropriate Type of Trust: Choose between first-party, third-party, or pooled trusts based on the source of the funds and the needs of the beneficiary.
  3. Select a Trustee: Choose a reliable trustee who understands the obligations of managing an SNT. This can be a family member, friend, or a professional trustee.
  4. Fund the Trust: Establish the trust with the appropriate funding source, ensuring that it aligns with the beneficiary’s long-term needs and eligibility for public benefits.
  5. Review and Update Regularly: As with any component of estate planning, it’s important to review and update the trust as circumstances change.

The trust requires ongoing management to ensure it remains compliant with legal requirements and continues to meet the needs of the beneficiary without affecting their eligibility for public benefits. This includes annual tax filings for the trust and regular reviews of the trust’s financial health and the beneficiary’s needs.Special Needs Trusts are not just a legal tool but a bridge to a more secure life for individuals with disabilities, ensuring they have the resources they need without risking the benefits they depend on. At The Dayton Law Firm P.C., we are dedicated to helping you navigate the complexities of estate planning for special needs, ensuring that your loved ones are protected and can enjoy the highest quality of life possible. Learn more about how we can assist you with establishing the right trust for your situation by scheduling your consultation today.