A person who suffers from a disability and is of an income or wealth status that they qualify for certain government benefits, e.g., Social Security Disability Income, Medi-Cal, etc., can benefit from a well set up special needs trust. Why? A special needs trust is loosely defined as an irrevocable trust that is set up or “funded” with assets for the benefit of or use by a person with a disability. So the person who has a disability is the beneficiary of the special needs trust. Because the benefits go to the beneficiary through the trust, as long as the trust is set up correctly, it does not jeopardize or interrupt the government benefits being received by the beneficiary for their disability. There are two main types of special needs trusts, one is called a third party special needs trust and another is called a first party needs trust. They are used in different factual situations but here are some general characteristics of each special needs trust.
A third party special needs trust is called a third party because it is established with the assets of someone other than the person with a disability. The person who contributes the assets to the trust is usually the person that sets up the trust, called a settlor. If set up correctly, a third party special needs trust allows the person with a disability, the beneficiary, to receive and hold the assets without losing public benefits. Additionally, the settlor is allowed to state instructions for the lifetime care, maintenance, and support of the beneficiary and even provide an alternate distribution upon the death of the beneficiary.
Just some of the many legal requirements for a third party special needs trust is that beneficiary cannot receive cash payments and cannot control the amount or frequency of trust distributions. Additionally, the special needs trust must be irrevocable which means the beneficiary cannot try and terminate the trust and use the funds for the beneficiary’s personal benefit. In exchange for this, the trust assets are not a countable resource to the beneficiary for government needs-based benefits eligibility purposes. A common example of when a third party special needs trust is utilized is when a family member suffers from a disability, and because of the disability they receive needs-based government benefits, and another family member with assets wishes to gift some of their assets to the disabled family member so they can use the assets for their care and maintenance. But in making the gift, the family member does not want to interrupt or terminate the government benefits being received by the disabled family member. A third party special needs trust, if set up properly, would allow the disabled family member to continue to receive the government benefits while also receiving the benefit of the gift from the family member for his or her “special needs.” Some examples of “special needs” would be travel, a new television, or a wheelchair accessible vehicle. The special needs trust funds can be used for most anything that the government benefits will not pay for.
So what is a first party special needs trust? Well, generally speaking, it is a federally sanctioned type of irrevocable 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 benefit programs. As long as a first party special needs trust is set up correctly, the transfer of the assets of the person with a disability will not jeopardize or interrupt the government benefits being received by them. A common example of when a first party special needs trust is utilized is when a person has a special need(s), e.g. becomes disabled, and either has assets or expects to inherit assets that would prohibit them from receiving government benefits. The disabled person can transfer their assets or receive the inheritance and transfer it into a special needs trust so that he or she can still be eligible to receive government benefits. One important distinction of a first party special needs trust is that the trust must contain language requiring, upon the death of the beneficiary, of needs-based government benefits received during the beneficiary’s lifetime.
In either case, special needs trusts can be very complicated estate planning devices or instruments. Any person or family who is faced with the above circumstances or is interested in obtaining further information about special needs trust should contact the Chilina Law Firm or another California attorney who practices in the area of estate planning for further information.
Authored by Greg Chilina and Co-Authored by Karen Chilina
Chilina Law Firm, a Professional Corporation, is a full-service estate planning, probate, trust administration, business law, and real property law firm that provides a wide-range of advising, transactional, and litigation services to its clients from its office located in Atascadero, California. The firm’s attorneys represent individuals and business entities in an assortment of transactional and litigation matters involving estate planning (including trusts, wills, powers of attorney, and medical directives), probate, trust administration, as well as general business law, contracts, corporate governance, land use, and real property. Chilina Law can be contacted by telephone at (805) 538-5038 or by email at info@chilinalaw.com or visit the Chilina Law Firm at www.chilinalaw.com. Chilina Law Firm is based in Atascadero, California and serves North San Luis Obispo County communities, including Santa Margarita, Atascadero, Templeton, Paso Robles, and San Miguel.
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