Special Needs Planning

Special Needs Trusts & Planning

Special needs planning in California is a critical aspect of estate planning for families with loved ones who have physical, intellectual, or developmental disabilities (sometimes referred to as having “special needs”). The goal is to ensure that a person with special needs is provided future financial support without jeopardizing their eligibility for vital public assistance programs, such as Supplemental Security Income (SSI) and Medi-Cal. A key component of special needs planning includes establishing a Special Needs Trust (SNT) (also known as a Supplemental Needs Trust), which allows funds to be managed for the benefit of the individual while preserving access to means-tested government benefits.

There are two main types of SNTs: the first-party SNT (sometimes referred to as a self-settled SNT or d4a trust) and the third-party SNT. In many instances, the third-party SNT is preferable to the first-party SNT as, unlike a first-party SNT, a third-party SNT does not require Medicaid payback provisions and can be created for the special needs individual no matter their age (a first-party SNT must be created by or on behalf of the disabled individual and funded with the individual’s own assets before the individual turns 65 years old).

A third-party SNT is always created by an someone other than the disabled individual who will be the beneficiary of the third-party SNT, and funded with the assets of someone other than the disabled individual (hence, the term “third-party”). For instance, a parent could create for a disabled child a third-party SNT and designate the trust as the beneficiary of a life insurance policy on the parent’s life, and a grandparent could also designate the same trust as the death beneficiary of the grandparent’s own IRA or 401(k).

Here are four reasons why a third-party special needs trust (SNT) should be considered over a first-party SNT:

  1. Third-party SNTs are not required to have Medicaid payback provisions.

  2. Third-party SNTs can be designed to be revocable during the lifetime of the person who created the trust.

  3. Other family members can help fund the third-party SNT that you create.

  4. You can create a third-party SNT for a disabled or special needs individual older than 65.

While a first-party SNT must be irrevocable, a third-party SNT can at the outset be either revocable or irrevocable.  Creating a revocable third-party SNT affords flexibility during the lifetime of the settlor or grantor. It is crucial that appropriate assets be used to fund the first-or third-party SNT and that the tax consequences be understood. Under the SECURE Act and its Final Regulations, there may be sound tax and cash flow reasons to designate a special needs trust as the death beneficiary of qualified retirement monies.  But it is also crucial that a revocable third-party SNT be designed to become irrevocable upon the occurrence of certain “triggering” events such as the death of the trustmaker or the trust becoming entitled to IRA or other qualified retirement funds upon the death of the IRA owner who designated the third-party SNT as the death beneficiary.

 

Also, if you are creating a third-party SNT for the benefit of a special needs family member, it is often preferable to create the trust as a standalone trust separate from your California revocable living trust. If a beneficiary of your estate plan receives government assistance benefits (or if you expect them to in the future), then it is best to incorporate into your estate plan a standalone third-party SNT for the sole benefit of the disabled or special needs individual.

If your loved one is disabled or has special needs, receives or will need to be eligible to receive, public benefits like SSI, and anticipates receiving a personal injury settlement or other monetary award, a first-party SNT will need to be created. Settlement planning with first-party SNTs is complex, often requires court approval, and should be initiated well in advance of funds being paid to the disabled or special needs individual.

 

But creating the SNT is only half the battle: the SNT must be properly administered and be “approved” by the Social Security Administration (SSA). Whether to permit the potential, future termination of the trust, how to define the term “special needs” in the trust, who the successor trustee should be, whether to include a trust advisory committee, and when and how to make distributions from the trust are very important questions that should be addressed at the drafting stage, with clear answers spelled out in the terms of the trust.

A third-party SNT is always created by an someone other than the disabled individual who will be the beneficiary of the third-party SNT, and funded with the assets of someone other than the disabled individual (hence, the term “third-party”).

Click here to read my blog article that provides a few examples of items an SNT may be able to pay for. In general, the SNT should be used to pay for expenses that the beneficiary’s government benefits do not otherwise cover, besides food or shelter. If SNT funds are distributed to pay for food or shelter, the payments will constitute In-Kind Support or Maintenance (ISM) and the beneficiary’s SSI amount will be reduced, which may or may not be manageable or desired. Intentional, ongoing planning and strategizing with the settlor or grantor and the trustee is crucial.

 

In California, it is common to designate a professional trustee as the trustee of an SNT.

As mentioned above, SNTs are one key element of a comprehensive special needs plan. Other key parts of a thoughtful special needs plan may include custody and guardianship of a minor child, planning with qualified retirement accounts, ABLE accounts, and perhaps other types of trusts.

 

In California, special needs planning involves a careful structuring of assets to ensure that the disabled individual’s financial future is secure. The mix may involve both public benefits and inheritance funds. It is essential to work with an experienced estate planning attorney who understands both state (Medi-Cal) and federal (SSA) regulations governing benefits eligibility, as well as the complexities of trusts and taxes. With the right planning, families can provide for their loved ones’ well-being while minimizing potential legal and financial challenges.