Special Needs Questions and Answers

Q: What is a special needs trust?

A: A special needs trust is a tool that can hold assets for the benefit of a disabled person, without those assets counting as the property of the disabled person. This is important, as Medi-Cal and SSI rules allow a beneficiary to possess no more than $2,000.00 of countable assets. Assets in a properly drafted special needs trust can provide supplemental benefits for an individual without counting against this $2,000.00 limit. A disabled individual can accordingly be a named beneficiary of the special needs trust and also continue to receive benefits under Medi-Cal and SSI. Without a properly drafted special needs trust, the receipt of an inheritance, personal injury settlement, or gift would cause an SSI or Medi-Cal recipient to lose their eligibility for benefits.

Q: What can a special needs trust pay for?

A: Depending on its terms, a special needs trust can pay for anything. The problem is not what the trust can do, but how the SSI and Medi-Cal programs will treat the receipt of income by the beneficiary. It is almost never a good idea to give cash, or anything that can be converted to cash, directly to the beneficiary. This type of distribution will generate an equivalent dollar reduction in benefits for every dollar given. Depending on the amount of cash given to the beneficiary, this could result in a loss of benefits completely. Purchases of food and shelter, known as In-kind Support, or "ISM" are also problematic. They can result in deductions in monthly benefits, or even complete loss of SSI or Medi-Cal coverage. The method of computing the penalty for ISM, however, can create circumstances where payment of rent, for example, can be quite advantageous. Whether distribution of ISM is advisable or not will depend on the facts of each particular case. The safest use of special needs trust funds is to purchase things or experiences for the beneficiary that are not redeemable for cash, and are not food or shelter (ISM). This is always permissible and, if properly done, does not result in any deductions. Such distributions are the heart of most special needs trust administrations. Examples are a computer, television or other household electronics; furniture and furnishings; books, CDs, DVDs; supplemental medical care or therapy; travel and entertainment; recreational activities; memberships… in short, the special items and experiences beyond the basics that bring enjoyment to our lives. Clothing, which until recently was considered ISM, is now permitted without restriction or deduction. Dollar restrictions on the value of personal property one is allowed to have were recently lifted, as well.

Q: Who acts as the trustee in a special needs trust?

A: Whoever the trust names would be the first choice to serve as trustee. We usually caution against family members or friends acting as trustee of special needs trusts. These, the very people who would be first choice as trustee of a standard trust, usually would not have the knowledge of Social Security and Medi-Cal income and asset rules that is needed to administer a special needs trust. The rules on ISM alone, as discussed above, can be a nightmare! Much can be at stake. We usually suggest a professional trustee for special needs trusts with family members acting as "Trust Advisors" or "Trust Committees." This is often the best of both worlds: the familiarity with the disabled individual only family can provide teamed with professionals experienced in the SSI and Medi-Cal regulations. Sometimes there is a family member who feels they can learn and manage the administrative rules and wants to be special needs trust trustee. In such cases, if the client desires, we will advise and assist the trustee in performing their duties as special needs trustee.

Q: What are the differences between "first party" special needs trusts and "third party" special needs trusts?

A: The "first party special needs trust," sometimes referred to as a "self-settled" or "D(4)(a) trust," is a trust established with the assets of the individual or their spouse. The Federal regulations concerning first person or "self-settled" trusts are very detailed and technical in who can establish them, how they are established, and the required language within the trust. Circumstances usually require that they be established by a Judge of the Superior Court at a formal hearing, and that they are subject to continued court supervision. Most notably, they must have a "payback provision" requiring the repayment to the State for any Medi-Cal benefits received. This repayment would apply to any assets left upon the death of the beneficiary or termination of the trust. Nevertheless, if properly established, a first party special needs trust can allow an individual on SSI or Medi-Cal who has received a windfall (inheritance, gift, personal injury settlement, etc.) to continue receiving their benefits, while also enjoying a life significantly improved by the resources of the special needs trust. The third party special needs trust is a special needs trust established with the assets of anyone other than the disabled beneficiary or their spouse….usually by parents or other family members of developmentally disabled or mentally ill children. They are much easier to set up and do not have the extensive requirements and limitations of a first party special needs trust. The most important difference is that there is no need for a "payback" clause. A third party special needs trust is a powerful planning tool for the family of a disabled individual who is, or who may be in the future, receiving Medi-Cal or SSI. Unfortunately, we frequently see clients, usually on SSI, who must establish a first party special needs trust because they are receiving an inheritance. This invariably could have been avoided if the person who left the inheritance had established a third party special needs trust for the share of their estate intended for the disabled individual. Sometimes we can avoid a first party self-settled trust by getting the court to reform the deceased family member's estate plan to contain a third party special needs trust with benefit-preserving language. Each case depends on its own facts, and we cannot always accomplish this. We urge those with disabled family members to plan ahead and avoid such dilemmas. Educate family members, such as grandparents, who may be leaving bequests, to seek the counsel of an elder law attorney regarding third party special needs trust language.

Q: We have three children; two sons and a daughter. Our daughter is developmentally disabled and receiving SSI and Medi-Cal. Do we need a special needs trust?

A: Probably. Without a special needs trust, assets left to an individual receiving SSI or Medi-Cal will likely cause them to forfeit their program eligibility. In some cases, if an inheritance or gift is large enough to more than compensate for a lifetime of benefits, the loss of the Medi-Cal or SSI may not matter. In most cases however, the receipt of "countable resources" over allowable asset limits will simply cause a few years of ineligibility until the gifted or inherited funds are exhausted. We know this is not what you would want to happen to your estate. Some parents would try and deal with this situation by disinheriting their daughter and leaving everything to their sons with an "understanding" that they would use the funds to supplement their sister's care. This has inherent risks you need not take with your daughter's future. You should consider incorporating a "third party" special needs trust into your family's estate plan.

Q: Are special needs trusts available to the elderly also?

A: The first party special needs trust discussed above is not available to those over age 65. The one exception would be if the trust was established prior to their 65th birthday when their benefits were based on disability, not age. Anyone, including someone over 65, can be the beneficiary of a third party special needs trust.

Q: We have a family trust, but are not sure if we have the correct third party special needs trust language in it. What should we do?

A: If your estate plan was drafted by an experienced elder law attorney, you should be fine. Elder law attorneys are familiar with both estate planning as well as SSI and Medi-Cal regulations. We stress the use of experienced counsel as we frequently review existing "special needs trusts" that have been drafted with inappropriate language. Nearly any attorney can insert a "special needs" provision into a family living trust. One must understand, however, whether a special needs trust is even called for, and if it is, the type of special needs trust needed, the required terms, and the appropriate administrative language. At San Diego Elder Law Center, we would be pleased to consult with you concerning your family's estate plan, and assess whether or not a special needs trust is appropriate. We also review existing estate plans and special needs trust to assure they are properly structured and most advantageous for the beneficiary and their family.

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