What is a Special Needs Trust?
A Special Needs Trust (SNT) is a type of trust designed to protect the assets of a person with a disability. It may be created by a parent, grandparent, conservator, guardian, or by the court, to receive and hold assets (such as inheritance, lawsuit settlement, or gifts). SNTs fall into two basic categories: (1) the third party SNT; and (2) the first party SNT. Within each category are various alternatives, but the basic structure is that assets are transferred into trust with a third party trustee for the benefit of the beneficiary with a disability who has no control over disbursements from the trust. The terms of the SNT directs the trustee to use the funds for the benefit of the disabled person (the beneficiary) in a way that supplements, but does not replace, public benefits such as Social Security Income (SSI) or Medi-Cal (California’s form of Medicaid).
A SNT may be revocable, which means it can be changed (amended) or revoked by the grantor. Others are irrevocable, meaning it cannot be amended or revoked by the grantor. Some irrevocable SNTs may be amended by the trustee, not the grantor, in order to comply with changing federal and state laws.
A Special Needs Trust works best as part of an integrated estate plan, including a Revocable Living Trust and wills for both parents. If all your estate planning documents are completed or amended at the same time, you can name your SNT as the beneficiary of whatever inheritance you want your disabled child to receive, and at the same time, ensure that your child will not inadvertently receive an inheritance that will disqualify him or her from SSI or Medi-Cal. Also integral to the establishment of the SNT, is to change all beneficiary forms – directing proceeds of pensions, life insurance, Individual Retirement Accounts (IRAs), and other assets that you wish to commit to the future care of your disabled child – to the trust rather than to the child. It is also very important that grandparents amend their trust and wills to ensure that your disabled child is not detrimentally affected by an inheritance from them, but that is it distributed to the SNT instead.
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Why Do I Need One?
As parents, we may think about what would happen if we weren’t there to raise our children. We may designate in a will who we would like to raise our children and who we want to handle the finances until they are old enough to responsibly manage the money for themselves and make provisions for their education and general well being. If your child is mentally, developmentally, or physically disabled, you need to consider what would happen if you made a gift at your death (such as inheritance from a will), named them as beneficiary on a retirement asset or insurance policy, or made them the beneficiary of an ordinary Revocable Living Trust. In California, these outright gifts of inheritance or trust designed to benefit the disabled child directly could impact the disabled person’s continued ability to receive public benefits.
The federal Social Security Administration operates the Supplemental Security Income (SSI) program. In California, like many states, an individual who is eligible for SSI benefits is automatically eligible for Medi-Cal benefits (California’s form of Medicaid). Under current federal law, SSI is intended to pay for the beneficiary’s food, clothing, and shelter. This means an SSI eligible beneficiary or his or her representative payee (agent) receives a monthly cash payment for support because the beneficiary is aged, blind, or disabled and because his or her assets and income are low enough to meet a “means test.” Once this test is met, an individual is considered “categorically needy.” If the SSI recipient receives too much income or has assets that are too great, he or she is likely to lose SSI eligibility – and the automatic Medi-Cal coverage along with it. In many instances, the loss of Medi-Cal coverage can be a more serious problem than the loss if SSI benefits!
The purpose of a SNT is to provide your disabled child with benefits you would have provided for them if you were still alive, in a way that supplements, but does not replace, public benefits such as SSI or Medi-Cal.
Replacing the love and care you give to your child may be impossible, but providing for a future filled with support and competent care is within your grasp. Planning now for the time your child must go on without you can be one of the greatest gifts of love you have to give.
“Why Should I set up a Special Needs Trust Now?”
If parents establish a SNT during their lifetimes, the trust will not need to have “pay-back provisions” in it, so long as the Special Needs person doesn’t already own the assets. The parents can designate who will take all the remaining assets left in the Special Needs Trust after the Special Needs Person dies. Conversely, remaining assets in some special needs trusts are subject to pay-back provisions. A pay-back provision is required if the trust was established pursuant to a court order, or if the Special Needs person or his or her spouse or conservator is establishing the trust with assets the special needs person already owns. Under pay-back provisions, the remaining assets will be applied to pay back the government for all Medi-Cal benefits supplied to the Special Needs person during his or her lifetime.
Why Not Just Leave Our Estate to Someone We Trust to Care for Them?
Parents may assume that if they leave their assets to the other family members with a moral obligation to “take care of” the disabled person all will be fine. The problem with this strategy is that no matter how good the intentions, life happens. The family member holding the money may get sued or divorced or otherwise lose the money, and there is no guarantee that it will be used in a manner that does not disqualify the disabled family member from receiving government benefits.
The best way to ensure that your disabled child will be provided for after you are gone is to create a Special Needs Trust.