mom and son creating special needs trust

What Is a Special Needs Trust?

Every family has unique estate planning needs because every family is different. Families come with different structures, different dynamics, and different needs for each member. Do you have a family member with special needs? If so, you may have worried about how to provide for them or how to give them a gift or leave them an inheritance without putting them at risk of losing needs-based government benefits such as Medi-Cal and SSI. Fortunately, there are ways to accomplish this goal. One such way is through a special needs trust.

What is a Special Needs Trust?

A special needs trust is specifically designed to hold assets for an individual with special needs without jeopardizing his or her eligibility for government benefits such as Medi-Cal and SSI. With a first-party special needs trust, the individual with special needs funds the trust. It can be funded with something like a personal injury settlement. The other type of special needs trust is a third-party special needs trust. This is funded by a person other than the individual with special needs. With a third-party special needs trust, the beneficiary, the individual with special needs, never had possession or legal ownership over the assets held within the trust.

Programs like Medi-Cal and SSI have strict rules in place for those who are eligible to receive these government benefits. For Medi-Cal and SSI, a beneficiary of the program is not able to possess more than $2,000 in countable assets. When a special needs trust is properly established and funded, the assets held within the trust will not be counted towards this $2,000 limit. This means that the special needs trust is a mechanism for a disabled individual enrolled in these income-based government benefits to benefit from an inheritance, gift, or legal settlement without losing their government benefits eligibility.

As previously stated, however, a special needs trust must be properly established and funded to work as it should. There are also limits on what a special needs trust can pay for without risking a loss of government benefits. If distributions are made from the trust for improper expenses or are made directly to the special needs beneficiary, then there could be a proportional reduction in benefits or a complete loss of benefits. This is why it is usually best to avoid cash distributions from a special needs trust to the beneficiary. 

It can be helpful to think of a special needs trust as a supplemental needs trust. In other words, the funds of the trust are meant to supplement to cover expenses not covered by government benefits. The special needs trust proceeds are not meant to replace government benefits. That is where the risk of loss of those benefits comes into play. Thus, the special needs trust should be used to pay for things not covered by government benefits, such as experiences.

Estate Planning Attorneys

At OC Wills & Trusts, we account for the uniqueness of each client we serve. No two estate plans should be the same because no two people are the same. OC Wills & Trusts is here for you. Contact us today.