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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