Special Needs Trusts and Planning
A special needs trust (SNT) can play an important part in preserving the financial security and lifestyle of a person with a disability. Special needs trusts allow individuals with disabilities to qualify for needs-based government benefits while holding on to additional assets which can be used to pay for expenses not covered by such government benefits. If a special needs trust is set up correctly, the beneficiary will not risk losing eligibility for government benefits, such as Medi-Cal or Supplemental Security Income (SSI), because of income or resources in excess of the eligibility limits. Special needs trusts generally fall within one of two categories: first party or third-party trusts. The difference in each of these trusts is based on whose assets were used to fund the trust. A first party trust is one that is funded with the assets belonging to the person with a disability, such as an inheritance, a personal injury settlement or money gifted to them by a family member. Usually the asset was owned, controlled by or managed by the person with a disability. A third party special needs trust is established by and funded with assets belonging to someone other than the beneficiary. A third party special needs trust is not controlled by the person with a disability.
Generally, when a parent or guardian wishes to establish and fund a trust for the benefit of a person with a disability, the attorney recommends a third party special needs trust be set up for the person with a disability. When the person with a disability has his or her own assets, it may be more appropriate to set up a first party special needs trust. However, it is crucial to take a look at the person with a disability’s entire situation and determine his or her goals so that the individual’s plan can be tailored to meet his or her needs.
Third Party Trusts
If a person with a disability cannot work or live independently, that person may need to remain eligible for needs-based public benefits, such as SSI or Medi-Cal, throughout that person’s lifetime. The receipt of an inheritance by a person with a disability might cause a disruption in eligibility for these vital benefits. Clower Law is here with you every step of the way to make a determination for the best course of action for the person with the disability and the family, including determining if a special needs trust (SNT) would be beneficial or available. A properly drafted special needs trust can hold assets for the benefit of a disabled person without those assets counting as the property of the disabled person. The assets of the special needs trust will supplement the public benefits that the person with a disability may be eligible to receive and will make it possible for that person to have the same quality of life in the future. In addition, Clower Law will assist with evaluating whether a special needs trust should be named as the beneficiary of life insurance policies, IRAs, or other retirement plans.
First Party Trusts & Settlement Planning
A first party special needs trust (SNT) may be desirable when a person with a disability has assets or expects to receive assets and those assets would disqualify him or her from eligibility for means-based public benefits. A first party SNT is a trust authorized by federal law. The purpose of an SNT is to allow an individual with a disability to receive assets while preserving the right to receive essential needs-based public benefits (usually Medi-Cal and/or SSI). A first party trust can be used when someone has received a settlement from a lawsuit/claim, such as personal injury award, medical malpractice award, etc.; when someone has received an inheritance from someone who did not plan for that person’s special needs; when someone is getting a divorce settlement so that the well spouse can provide alimony to a trust in lieu of sending payments directly to the disabled spouse, so that disabled spouse can remain on needs-based benefits.
The things that differentiate a first party SNT from a third party SNT are the following:
- It must be funded with assets of the person with a disability
- The person must be under 65 years of age at the time it is funded
- The person must be disabled
- It must be for the “sole benefit” of the person with a disability
- It can be established by a parent, grandparent, legal guardian, or a Court; recent legislation now allows the individual to also establish the trust if the individual has the capacity to do so
- The trust must be “irrevocable,” which means that it is not changeable
- At the beneficiary’s death, Medi-Cal must be reimbursed for any benefits to the beneficiary that were provided after the creation of the SNT
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