Special Needs TrustsPurpose: The primary purpose of a third party special needs trust is to preserve government benefits for disabled beneficiaries. Usually the benefits involved are from government programs that have eligibility requirements. Receipt of an inheritance will disqualify the beneficiary for future government benefits.
Government Programs: Two of the programs that are based on financial need are Supplemental Security Income (SSI) and Medi-Cal, which is the California version of the Medicaid program. Housing subsidies, also called the Section 8 program, In Home Support Services, food stamps, and utility payment assistance are also based on financial need.
However, Social Security and Medicare are not based on financial need, but are instead based on the applicant's age and earnings record.
Hypothetical Example: Suppose a couple has three adult children who will divide a $600,000 estate after both parents have died. One of the children is receiving SSI benefits due to a mental disability and has difficulties with money. Because the child is receiving SSI benefits, the child is also eligible for Medi-Cal benefits for his continuing medical and mental problems. This child is not given large amounts of money by his family because he is likely to waste anything he is given. If the couple sets up a traditional distribution plan in their wills or trust that gives everything to their children equally, their disabled child is likely to have major financial problems. If the child outlives his parents, he will inherit approximately $200,000, which will increase his assets far above the limits set by the SSI program and by the Medi-Cal program. The child will be disqualified from those programs and will receive no further benefits. After spending his inheritance, perhaps within just a few months, the child will have no assets, and great difficulty in returning to the SSI and Medi-Cal programs.
The Special Needs Trust: Instead of leaving assets directly to the disabled adult child, the parents could establish a Third Party Special Needs Trust in their living trust or wills. This trust would not be under the control of the child, and the child would not be able to revoke it and use the assets for his own purposes. The trust would have an independent trustee and would continue for the lifetime of the child. (This is known as a "Third Party Special Needs Trust" because the beneficiary has no control over the trust. There are other types of special needs trusts that are funded with assets belonging to the beneficiary, known as Litigation Special Needs Trusts, that are not discussed here.)
A Third Party Special Needs Trust can own various assets that are used by the child, but due to the ownership by the trust, the assets are not counted as being owned by the child. The trust could also pay for services required by the beneficiary, such as telephone, education, car repairs, etc., without affecting the beneficiary's eligibility for the government programs. The trustee, however, would not make cash payments to the child because the payments would be counted as income for the beneficiary and could result in reduction or loss of benefits. The trust could also own a home for the child, thereby reducing the child's expenses for rent, although there may be some reduction in SSI benefits as a result.
Benefits of Special Needs Trusts: The Third-Party Special Needs Trust has no obligation to notify the state or pay back Medi-Cal payments after the beneficiary's death because the beneficiary did not own the assets. This type of trust prevents the beneficiary from controlling the assets, but also maintains a means of helping the beneficiary with the assets held by the trust. (However, when a Litigation Special Needs Trust is used, the state must be notified when the beneficiary dies and Medi-Cal payments may have to be repaid to the state from the Litigation Special Needs Trust.)
Problems with Special Needs Trusts: When the parents' estate plan becomes irrevocable, usually through the deaths of the parents, the special needs trust also becomes irrevocable. If the beneficiary regains mental or physical capacity after that point, making changes to the trust or revoking it can be difficult, and will require court approval. Unless the beneficiary is severely disabled and has no hope of financial survival without the government programs, a special needs trust may not be the answer.