What is a Special Needs Trust?

Every parent or grandparent wants to know that their child or grandchild will be cared for after they’re gone. This is especially true when their child or grandchild has a disability and will require additional lifetime care. A special needs trust (SNT) is an excellent way to ensure that happens.

Purpose

Children with disabilities generally are entitled to some form of governmental assistance depending on the family’s financial circumstances. If qualified, they’ll receive Medicaid (Medi-Cal in California) or Security Supplemental Income (SSI).  Unfortunately, it’s quite possible for their inheritance to disqualify them from those benefits due to the eligibility cap on income and assets. A special needs trust allows a parent or grandparent to provide for a child’s future needs while simultaneously enabling the child or grandchild to still qualify for governmental assistance. In essence, it’s an attempt to deliver the best of both worlds. The special needs trust provides funds to supplement public benefits without interfering with those benefits.

A special needs trust may be used to supplement the child’s medical expenses, cover the cost of transportation, or even assist with things such as entertainment costs or pet care. The trust helps to enhance the beneficiary’s overall quality of life. This is especially valuable after the child’s primary caregiver is no longer able to care for him or her. If you’re worried about your child or grandchild’s future well-being, a special needs trust could be the most effective financial tool for preserving their ongoing care.

Options

There are two primary types of special needs trusts; the first party special needs trust and the third party special needs trust. A first party special needs trust is a federally authorized safe harbor trust that allows an individual with a disability to transfer his or her own assets into the trust without being penalized by needs-based public programs. A third party special needs trust is the best method for bequeathing or gifting assets to a person with a disability. This type of special needs trust is called a third party special needs trust because it is established with the assets of someone other than the person with the disability. By using one of the categories of special needs trust referenced above, your child should still be able to meet the financial requirements for governmental assistance. The assets in the trust won’t disqualify the beneficiary from Medicaid, SSI, or other benefits.

One of the key differences between a first-party special needs trusts and third-party special needs trusts is what happens to the assets after the death of the beneficiary. Upon the beneficiary’s passing, the trustee of a first-party special needs trust must use the remaining assets to reimburse any Medicaid (or Medi-Cal) benefits paid on behalf of the beneficiary during his or her lifetime.  In contrast, a third-party special needs trust cannot be pursued by the beneficiary’s creditors. A third-party SNT can designate other beneficiaries, making it a useful planning tool for people who both want to protect the primary beneficiary with disabilities and ultimately control the distribution of assets to others (often within the family).

Considerations

Planning for persons with disabilities can be very difficult, but it can be extremely beneficially to establish a special needs trust in California. Because the legality and financial considerations of a special needs trust can be surprisingly complex, we do not recommend creating one on your own. It’s always recommended that you have professional help. Contact Ibar Special Needs Trust Advisors to receive assistance.