Creating a Special Needs Trust

The Special Needs Trust

A special needs trust is a very particular type of trust that not only provides a set of instructions for the future care of a disabled child, it also works to preserve that child’s access to public benefits.

In the past, families were often faced with a cruel dilemma: if they left their special needs child a home, life insurance payout, or cash inheritance, their legacy’s value could supersede the child’s right to Supplemental Social Security, Medi-Cal, and other critical government services.

While some parents have enough money to ensure their child never needs to seek help from outside the family, most people—especially in a high-cost state like California—lack the resources to protect a special needs child for the remainder of their life.

A special needs trust is a government-approved compromise: it lets the beneficiary retain access to SSI and other public services, while permitting the trust to disburse funds for other needs, including:

Daily living expenses

Care-giving

Home renovations, especially those needed to keep the beneficiary safe

Living arrangements

Setting up a Special Needs Trust

Anyone with a particular interest in the child’s health and well-being can establish a special needs trust. This includes parents, grandparents, extended family, and even friends.

No matter who funds the trust, remember that a special needs trust should always be established before the child is likely to receive their first substantive inheritance. In most cases, this means the trust agreements should be drafted and finalized before the parents pass away.

If a trust is not founded before the founder—or trustor’s—death, and the special needs child receives an inheritance, they may be disqualified from SSI and other assistance programs for years to come.

Two Types of Special Needs Trusts

California recognizes two different types of special needs trusts: first-party trusts and third-party trusts. The difference between these two types of trusts relates to funding.

First-Party Trusts

These trusts are funded by assets that either belong to the intended beneficiary—the child—or assets to which the beneficiary would otherwise be entitled such as the proceeds from a grant or lawsuit settlement.

First-party trusts are subject to certain restrictions. They must be compliant with both state and federal law. If the trust is terminated early, for any reason, the beneficiary must typically reimburse the state for assistance they receive to which they would not have been entitled if the trust were not in place.

It’s important to note that first-party trusts can further be divided into the following two categories:

(d)(4)(A) trusts, which may only be established for special needs persons under the age of 65.
Pooled trusts, which can only be established by a non-profit organization. While a pooled trust will maintain separate accounts for individual beneficiaries, they are funded by “pooled” investments.

Third-Party Trusts

These trusts are funded by assets which never belonged to the beneficiary and to which the beneficiary would never have been entitled. Unlike first-party trusts, neither California nor the federal government can compel a child to pay back state benefits if a third-party trust is revoked or terminated early.

However, anyone who establishes any type of special needs trust—be it a first-party (d)(4)(A) or a third-party—must notify the California Department of Health Care Services (DHCS) within 15 days of the trust’s establishment, or instruct their appointed trustee to do the same. The trustee must also notify the California DHCS when the trust terminates.

Choosing a Trustee

Typically, the person who founds a special needs trust will name themselves as trustee. After all, most trustors are the child’s parents, and most parents are also their child’s primary caregivers.

However, the original trustor may still wish to appoint a successor trustee, or someone to act as trustee once they die.

When evaluating prospective trustees, consider:

If they are willing to do the job.

Not everyone has the time or ability to oversee another person’s well-being. Before appointing a trustee, explain your expectations and conditions carefully.

If they are familiar with the beneficiary.

Typically, you’ll want to select someone who is familiar with the beneficiary, their daily routine, and the demands of their care.

If they have any conflicts of interest.

Some people choose to “reward” their successor trustee by making them the “remainder beneficiary”—meaning they will receive the trust’s leftover assets once the trust period expires. This can be a poor decision, as it may incent the successor trustee to withhold critical funds for themselves.

If they are financially competent.

A trustee must sometimes make difficult decisions, both to ensure the child’s well-being and to avoid prematurely depleting the trust’s assets.

You may wish to retain a professional trustee. An estate planning attorney, for instance, will likely know how to administer a special needs trust. They can also assist in ensuring that your trust complies with state and federal law and is written to provide maximum benefits.

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