Special Needs Trusts
A special needs trust is designed to distribute a gift or other large lump sum over time, in the form of in-kind assistance with "special needs," so it does not harm a beneficiary's ability to make use of Medi-Cal or Supplemental Security Income (SSI). This can be life-saving when a beneficiary otherwise would be trying to meet most needs with inadequate cash income in order to continue on benefits that cover necessary medical treatment and/or attendant services.
Some family members may think the best they can do for a person who receives disability benefits is to leave them out of the estate plan but give assets to other trusted people with a request that they meet the disabled person's needs informally. Unfortunately, this kind of arrangement, especially where one sibling is asked to provide for another, can lead to inequities, resentments, and paternalism.
A special needs trust places a defined group of assets in the hands of a trustee, who then uses it to provide items or pay bills within exceptions to the income and asset rules of the SSI and/or Medi-Cal programs. Assets are only made available to the beneficiary in the forms and amounts that the trustee chooses to distribute, at the time they are distributed.
A special needs trust might pay for phone bills, cab fares, household items, assistive devices, or the wages of a caregiver or advocate. It might pay for materials and accommodations to support the life beneficiary’s work or studies. If it provides housing the SSI cash benefit may be reduced for "in-kind support and maintenance," but often by an amount less than the actual value of the housing.
The trust can be written to give the trustee a choice to manage it either as a "special needs trust" while the beneficiary has to comply with public benefits program rules, or as a "support trust" with fewer restrictions if the beneficiary is no longer receiving benefits but could still use a backup fund for big expenses. The main requirement is that the beneficiary may not control the assets.
For people who became disabled before age 26, a special needs trust may work in combination with a federally authorized ABLE account to accept and use gifts of a few thousand dollars at a time or to manage limited savings of the beneficiary's own money.
Types of Special Needs Trusts
A special needs trust to distribute a gift or bequest from one or more donors is a "third-party" special needs trust. This is the type we generally draft as part of estate planning.
A first-party special needs trust is one that uses the beneficiary's own money. Occasions for creating such a trust may include a lump-some payment from a lawsuit or insurance settlement; a large lump-sum gift or bequest that the giver did not place into a third-party special needs trust; or the house, savings, or other assets of someone with declining income who wants to put off having to rely entirely on disability benefits.
First-party special needs trusts can be difficult to establish and maintain. Rather than create a freestanding first-party special needs trust for family members to maintain, we would often suggest the use of a "pooled" special needs trust in which trust assets are managed for a group of beneficiaries by a nonprofit that has continuing staff to maintain and if necessary amend the trust as requirements change.
Plan for Benefits Eligibility Carefully
In making decisions of this type, however, it is important to seek legal advice. Clumsy or furtive steps in this area can mean serious trouble, especially in dealing with the strictly regulated cash aid programs.
Compared with these other asset preservation approaches, special needs trusts are sometimes more complicated but they are also more flexible and they allow more room to build in checks and balances. In addition to tie-breaking or mediation provisions, a trust settlor (grantor) could choose to name an advisory committee of friends and family members with medical and social service training. The trust might give the committee the power to appoint an institutional trustee if they think that a family member serving as trustee is not managing the trust well. Or the grantor might name an outside “trust protector” to step in if either the trustee stops acting reasonably and effectively, or the laws change that led to the framing of the trust.
Given the limits of our current public benefits and medical funding systems, a special needs trust can be a valuable way both to plan for the future in a system that actually encourages improvidence, and it can also be used to build a team of helpers who will be able to maintain a disabled person's support system over time.