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Special Needs Trusts

What is a Special Needs Trust?

A Special Needs Trust is a type of trust that can hold assets for and distribute payments to a disabled child or adult, while at the same time preventing him or her from being disqualified from receiving Supplemental Security Income (SSI) or Medi-Cal. Although the disabled child or adult is named as the beneficiary of the trust, the assets are not counted as his or her available resources because the assets are not within his or her control. For example, a disabled person can have millions of dollars in a Special Needs Trust, and still qualify for means-tested SSI and Medi-Cal.

Why does a person with disabilities need a Special Needs Trust?
Most children or adults with disabilities need a Special Needs Trust so that they are still eligible for SSI and Medi-Cal benefits. SSI is a federal needs-based program that is based on income. Once a special needs person qualifies for SSI, they automatically qualify for Medi-Cal (the California version of Medicaid). Qualification for Medi-Cal is critical, because income from SSI will usually not meet an individual’s minimum financial needs. However, Medi-Cal could pay for hundreds of thousands of dollars in a special needs child’s medical expenses before and after the parents’ deaths that could otherwise drain significant assets from the child’s family.

Why is it a good idea to set up a Special Needs Trust now?
If parents establish a Stand-Alone Special Needs Trust during their lifetimes, the trust will not need to have pay-back provisions included in it, so, as 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 passes away. However, there are situations in which the 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 persons conservator, parent or grandparent 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. A Special Needs Trust may be established by the court for your child if you do not set one up during your lifetime, but it would have to have pay-back provisions. By setting up a stand-alone Special Needs Trust now, you can avoid not only potential problems with gifts and inheritances to your child, but you can also ensure that he or she will not have to have a future trust that has pay-back provisions.

After I die, can’t I and any other family members just leave my child an inheritance, or give him a monetary gift without a Special Needs Trust in place?
A gift or inheritance that leaves a child with disabilities or adult with non-exempt assets in excess of $2,000 is will disqualify your child from benefits until the assets are “spent down” to $2,000 or less. If your child receives or inherits more than $2,000 in countable assets, he or she will be disqualified from receiving SSI and Medi-Cal benefits. He or she may also not qualify for private health insurance, and could be left paying for his or her medical expenses. With the high cost of medical treatment, in many cases, disqualification from Medi-Cal causes the child’s inheritance to be exhausted within two to three years. After that, for the rest of his or her life, your child will be completely dependent on family members and poverty level SSI governmental assistance. This situation will in turn, drain the assets of the other children in the family and other family members. It is very important for parents to understand that potential disqualification from Medi-Cal is the single most important reason why it is critical parents set up a Special Needs Trust for their child now.

Some attorneys tell me they can prepare a Testamentary Special Needs Trust for me. What is the difference between a Testamentary Special Needs Trust and a Stand-Alone Special Needs Trust?
A Special Needs Trust that is part of your own revocable Living Trust is called a Testamentary Trust. This means that it does not take effect until you pass away. While it is not a bad idea to set up a Testamentary Special Needs Trust, there can be certain drawbacks. For example, as part of the parents’ estate, a Testamentary Special Needs Trust could be subject to the parents’ creditors and lawsuit claims. In addition, grandparents or other persons who die before the parents cannot leave inheritances to it. Only the parents, or persons who die after the parents can fund a Testamentary Trust. If the grandparents die before the parents and leave an inheritance to a special needs child without a Stand-Alone Special Needs Trust, the inheritance, if over $2,000, will disqualify the child from crucial benefits until the inheritance is spent down. You can avoid all of these problems, and protect your child in many other ways by establishing a Stand-Alone Special Needs Trust for your special needs child.

Please be advised that the information on this site is not meant to be construed as legal advice. If you need legal advice, or for more information about a Special Needs Trust, please contact our office at (562) 594-4200 for a FREE 30-minute consultation!