Special Needs Trust

A Special Needs Trust is a legal entity established for the purpose of providing financial assistance to a disabled person who qualifies or may qualify in the future for public benefits.  A Special Needs Trust has to meet all of the requirements of any Trust:   1) a Trustee; 2) assets to be funded into the Trust; 3) a beneficiary; and 4) a valid Trust purpose.  

The Trustee of the Special Needs Trust will manage the investment of the assets in the Trust.  The Trustee will distribute the assets in the Trust as needed for the benefit of the disabled person.  The assistance provided to the disabled person from the Trust must be structured in such a way so that it will not interfere with the beneficiary's eligibility for public benefits.

Public benefits, such as Medicare, Medi-Cal and Social Security income,  provide the minimum basic daily needs: housing, food and medical care.  But the disabled person cannot own more than $2,000 of assets in order to qualify for these public benefits.  Assets in a Special Needs Trust do not count as an asset of the disabled person and are considered an exempt asset.

A Special Needs Trust supplements the public benefits.  It can provide for benefits such as extra educational opportunities, travel, and extra medical care not provided by public benefits.  There are two kinds of Special Needs Trusts:  one established by the beneficiary (First Party Trust) and one established by someone other than the beneficiary (Third Party Trust).

First Party Special Needs Trust

First Party Special Needs Trust MakerA First Party Special Needs Trust is a Trust funded with the disabled person's own money.  This type of Trust is most commonly used when the disabled person receives a "windfall" such as litigation proceeds or an inheritance.  If the disabled person is or would qualify for needs based public benefits, special planning for their litigation proceeds or inheritance is often required to preserve his or her eligibility for those public benefits. 

One of the drawbacks to using this type of Special Needs Trust is that it requires Court approval and is subject to continuing Court supervision.   Thus, First Party Special Needs Trusts are more costly to create and maintain.

In cases where the windfall is large, a First Party Special Needs Trust is favored because it is the only option that allows the disabled person to preserve the funds for future special needs and preserve (or qualify for) needs based public benefits. All other planning options require the spending of the assets as soon as possible or the loss of needs based public benefits.

In cases where the funds received are modest, it is wise to consider other available options for a disabled person to maintain public benefits.  For example, the funds can be spent on an exempt asset such as a primary residence or an automobile.  Such options might be a reasonable alternative to incurring the expense of creating and maintaining a First Party Special Needs Trust.

However, if the goal is to preserve the needs based public benefits and the future use of funds, a qualified First Party Special Needs Trust is likely the only solution for the disabled beneficiary receiving a large windfall, lawsuit settlement or inheritance.

Third Party Special Needs Trust

Many families have a child who is disabled and the parents wonder how to take care of the child after they are gone.  They prefer not to give the disabled child money outright.  They also do not want to give the money to another sibling to manage the money for the disabled child.  They do not want to disinherit the child.  It may also be that the disabled child would be unable to manage an inheritance themselves.   One option is to establish a Special Needs Trust for the benefit of the disabled child.  

Special Needs person in need of a 3rd Party TrustA Third Party Special Needs Trust is much simpler and less costly to establish than a First Party Special Needs Trust as it is usually not subject to Court approval and review.  The parent, grandparent or other family member who establishes the Special Needs Trust can also provide instructions about how they wish the money to be used for the benefit of the disabled person.

A Third Party Special Needs Trust can be built into a Revocable Living Trust established by someone other than the beneficiary or the beneficiary's spouse or can be part of a Testamentary Trust in a Will of someone other than the beneficiary or the beneficiary's spouse. 

A Third Party Special Needs Trust can also be created in a stand alone document.  The stand alone Special Needs Trust must be irrevocable. 

A stand alone Trust Agreement has the advantage of allowing other people, such as grandparents or siblings, besides the Trustor (the person who created the Trust) to add assets to the Trust such as grandparents or siblings. A stand alone Third Party Special Needs Trust can be named as a designated beneficiary of a retirement plan of a third party.  Anyone can make the annual tax exempt exclusion gifts of $13,000 (current amount) to a Third Party Special Needs Trust. 


A Special Needs Trust can be a powerful tool in an estate plan for a family where there is a disabled person.      

As always, you should consult an attorney who is knowledgeable in estate planning to find out if a Special Needs Trust is appropriate for your estate plan. 

We at the Law Offices of Julia P. Wald have experience in establishing Special Needs Trusts and will be glad to help you. 

Call us today at 415-482-7555.