California Special Needs Trusts: The Good, The Bad & The Ugly
Why does anyone need a California Special Needs Trust?
Simply put: So that government benefits can be preserved and a special needs person can live a fulfilling life. If you want to leave money or property to a loved one with special needs in California, you should not do so outright in a Will, Living Trust, or by simply doing nothing. Instead, thoughtful planning is necessary and the use of a carefully drafted California Special Needs Trust (“SNT”) is recommended. Why is this true? Well, first of all, you should know that if a robust California SNT is not established, you could jeopardize your loved one's ability to receive crucial government benefits. And second, just setting up any old Trust with a few special needs provisions is unlikely to address the full breadth of issues that can arise over the lifetime of a Special Needs Beneficiary. Fortunately, a conscientiously drafted and funded California SNT not only preserves government benefits, it also helps your loved one live a fulfilling life, even when you're not around to ensure that happens.
Who Can Set Up A Special Needs Trust?
Anyone. In a perfect world though, a Special Needs Beneficiary should not set up his or her own SNT. Sounds simple enough but most of the time, people just miss (or mess up) this first and fundamental step. That is, they either do nothing, create a Last Will & Testament, or spend lots of time and money creating a basic Revocable Living Trust, all of which do nothing to help a Special Needs Beneficiary. After the “planning” or lack of planning is done, the Grantor (usually the parent) then passes away, leaving his or her assets to the Special Needs Beneficiary. At this point, when the Special Needs Beneficiary is facing the loss of government benefits, a sibling or other loved one usually calls a trust attorney well versed in Special Needs Planning, but much to their chagrin, the sibling discovers that the best planning options died with mom and dad.
What's the best type of Special Needs Trust: "Third-Party SNTs"
Special Needs Trust Quiz:
Do you understand the difference between a third-party & first-party Special Needs Trust?
If you did not answer "YES" to the Quiz above and you have a special needs child, please study this Hub until you understand the differences in SNTs perfectly...
YES, it's that important!
What's the Big Deal if Mom or Dad leaves money or property to a Special Needs Beneficiary without a Special Needs Trust?
Without a special needs trust, money or property left to an individual receiving SSI, Medi-Cal, or other government benefits, will cause that special needs child to no longer qualify for those benefits. That probably means your loved one must forfeit government benefits, at least for the time it takes your special needs beneficiary to spend all that money or property you left him or her.
On the other hand, if an inheritance or gift is large enough to more than compensate for a lifetime of benefits, the loss of Medi-Cal, SSI, or other government benefits may not matter. But this situation is rare. In California, the cost of living is high, especially for people with special needs. That's why setting up a special needs trust almost always makes sense. When parents do not set up a SNT in advance of their death, the receipt of "countable resources" (i.e.-the inheritance) by their special needs child over allowable asset limits will generally cause a few years of benefits ineligibility. After the gifted or inherited funds are exhausted or spent, that special needs person can again apply for government benefits. It goes without saying that this is not the result most parents want for their child.
Before widespread use of SNTs, it used to be that family members had a dilemma when it came to their own estate plans and their special needs beneficiary - either the family member disinherited the beneficiary or gave them an outright testamentary gift. Of course, disinheritance was the last thing that a parent or grandparent would want to do to that special needs (grand-)child. Out of all of the family beneficiaries, the one they disinherited was the one who needed the funds the most. But, the problem was (and is) if they gave the beneficiary an outright testamentary gift and that gift exceeded the applicable resource limit ($2,000 in 2014), the beneficiary would then lose their government benefits - Supplemental Security Income (“SSI”), Medi-Cal, Section 8 housing, etc.
So the idea for supplemental trusts began in the mid 1970s and California was the leading state in developing today’s “special needs trusts.” Throughout the United States, the terms “supplemental needs trust,” “supplemental trust,” and “special needs trusts” are used to describe the same type of trust, which we refer to in this Hub as a “special needs trust.” The key concept with a special needs trust, and what is required in order for it to not affect the beneficiary’s SSI and Medi-Cal benefits, is that the beneficiary has no power to revoke the trust or to direct the use of the trust assets for his or her own support and maintenance.
How can parents ensure that their child gets government benefits, but still be able to enjoy the benefit of assets inside a California Special Needs Trust?
Well, it's important to understand how SSI, Medi-Cal, and other government benefits work in relation to special needs trusts. SSI is the federal assistance program that provides a guaranteed income to persons who are blind or disabled. A person is disabled if they are “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.” 42 USC §1382c(a)(3)(A).
But means-based benefits are not automatic for the blind or disabled. There are both resource and income limits in order to be eligible for SSI. The resource limit for 2014 is $2,000 for a single person. That means a qualified SSI beneficiary cannot have more than $2,000 in cash or other liquid assets. Conversely, some items that are excluded from this resource limit are the individual’s personal residence, a vehicle, furniture, clothing, and personal care items, as well as a few other specific assets.
As to income limits, both earned and unearned income are considered when determining the SSI benefit amount. There are several different types of income and they are all treated slightly differently when it comes to SSI. Basically, if the income or other assistance can be converted into food or shelter, then SSI will count it as income and either reduce, or completely get rid of, the beneficiary’s monthly SSI payment.
One point for individuals to know is that generally the resources and income of the beneficiary’s parents are “deemed” available to the beneficiary if that beneficiary is unmarried, under 18 and living at home. Income of one spouse will also be deemed available to the other spouse. Deeming can have a significant impact on whether the beneficiary qualifies for SSI.
SSI is very important because if an individual qualifies for SSI, then he or she will automatically qualify for various other government benefit programs - such as Medi-Cal. Medi-Cal is California's version of the federal Medicaid program. It provides payments for hospitalization, treatment in medical clinics, doctors’ services, lab tests, X-rays, home health care, nursing home care, and other related medical services. It also pays for community mental health, drug abuse services, and intermediate care facilities for the developmentally disabled. (Please note that in the ACA section below we discuss how the Affordable Care Act now provides some of these benefits, but nevertheless does not provide all of them. Thus, the need for Special Needs Trusts has not been displaced.)
As mentioned above, the key factor in whether assets in a special needs trust will be considered resources or whether distributions from that trust will be considered income with respect to SSI, are the beneficiary’s powers over the trust – i.e., if the beneficiary can revoke the trust or direct the use of trust assets for his or her support and maintenance, the trust will disqualify the individual from eligibility to receive SSI and Medi-Cal. Conversely, so long as the special needs beneficiary cannot exercise these powers, the SNT trustee can pay for countless goods and services that benefit your special needs child.
When Should a Special Needs Trust Be Established?
Just as important as the “who” and “why” questions regarding Special Needs Trust establishment, is the question of “when” a SNT should be set up. The answer as to when a SNT should be set up is always 100% unequivocally BEFORE mom and dad pass away. In other words, if the special needs child inherits the money or property outright, even via a California Will or Living Trust, they are in a distinctly worse position than if they had never received that money or assets (for purposes of planning with government benefits) in the first place. But parents often make this mistake and leave money and/or property outright to their special needs child. The right way to do it however, is in advance, through the use of a third-party Special Needs Trust, rather than after the fact, via a first-party SNT.
The difference which results from a first party vs. third party SNT is so critical that it requires a more detailed explanation. If you miss this point, you might as well open up your checkbook and write a check to the government. And no, that is not a joke!
Third Party Trust vs. First Party Trust?
Third-Party Special Needs Trusts
A third-party special needs trust is the best type of trust used to benefit a person with special needs. Commonly, family members will create a SNT and leave money and property to that trust through their estate plan (their will, trust, life insurance, or other beneficiary designation). The trustee of that trust then uses trust funds to support the person with special needs. When doing so, the trustee must carefully abide by trust requirements – trust funds cannot be used for anything that would make the beneficiary ineligible for benefits, such as cash gifts. (Please note that under the Affordable Care Act discussed below, it will probably become more commonplace to allow certain types of tailored gifting that actually goes against traditional thinking, so that beneficiaries receive the best medical care possible.) The trustee will continue to use trust funds for many other things, including classes, hobbies, luxury items, personal services, furniture, professional fees, computer equipment, pet supplies, transportation, and vacations. With a third-party Special Needs Trust, the beneficiary never owns the property in the trust and he or she does not have direct access to trust funds.
First-Party Special Needs Trusts
Unlike third-party trusts, which are funded by property owned by someone other than the beneficiary, a first-party special needs trust is used for the property of a person with special needs. The ways in which a person with special needs might acquire property are though a:
1) personal injury award,
2) retirement plan,
3) divorce settlement,
4) life insurance policy, or
But as discussed in the previous sections, if a person with special needs owns any significant amount of money or property outright, it will affect their eligibility for government benefits. So at this point (because the special needs beneficiary is left with little choice), instead of owning the money or property directly and losing out on their benefits until they have spent their excess money/property, the person with special needs puts that money/property into a first-party special needs trust. If the trust is created properly, adhering to strict government rules, those assets can be used to benefit the person with special needs without jeopardizing eligibility for government benefits.
There are several variations and names for this type of trust, including a “payback special needs trust,” “litigation special needs trust,” “Miller Trust,” “pooled SNT,” “(d)(4)(A) SNT,” or “(d)(4)(C) SNT.” All of these trusts are subject to specific federal and state rules designed to keep applicants from sheltering their property in order to meet program eligibility requirements. They are also generally subject to the “payback” rules which require that the State be reimbursed for medical expenses, after the trust beneficiary dies.
The "first-party special needs trust," sometimes referred to as a "self-settled" or "D(4)(a) trust," is a trust established with the assets of the individual or their spouse. The Federal regulations concerning first person or "self-settled" trusts are very detailed and technical in who can establish them, how they are established, and the required language within the trust. Circumstances often require that they be established by a Judge of the Superior Court at a formal hearing, and that they are subject to continued court supervision. Most notably, they MUST have a "payback provision" requiring the repayment to the state for any Medi-Cal benefits received. This repayment would apply to any assets left upon the death of the beneficiary or termination of the trust. Nevertheless, if properly established, a first-party special needs trust can allow an individual on SSI or Medi-Cal who has received a windfall (inheritance, gift, personal injury settlement, etc.) to continue receiving their benefits, while also enjoying a life significantly improved by the resources of the special needs trust.
Are there different types of first-party special needs trusts?
Yes. The first of these (which we already discussed) is called a "payback" or "(d)(4)(A)" trust, referring to the authorizing statute. "Payback" trusts are created with the assets of a disabled individual under age 65 and are established by his or her parent, grandparent, legal guardian or by a court. They also must provide that at the beneficiary's death any remaining trust funds will first be used to reimburse the state for Medi-Cal paid on the beneficiary's behalf. This includes Medi-Cal paid for the special needs persons benefit, prior to receipt of the inherited funds that go into the first-party SNT! Wow!
In addition, Medi-Cal and SSI law also permits "(d)(4)(C)" or "pooled trusts." Such trusts pool the resources of many disabled beneficiaries, and those resources are managed by a non-profit association. Unlike individual special needs trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary his- or herself. In addition, at the beneficiary's death the state does not have to be repaid for its Medi-Cal expenses on his or her behalf as long as the funds are retained in the trust for the benefit of other disabled beneficiaries. (At least, that’s what the federal law says; some states require reimbursement under all circumstances.) Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medi-Cal or SSI, those over age 65 who make transfers to the trust will nevertheless incur a transfer penalty. Again wow!
SO TO RECAP: The third-party special needs trust is a special needs trust established with the assets of anyone other than the disabled beneficiary or their spouse, usually by parents or other family members of developmentally disabled children. They are much easier to set up and do not have the extensive requirements and limitations of first-party special needs trusts. The most important difference is that there is no need for a "payback" clause in a third-party SNT. A third-party special needs trust is a powerful planning tool for the family of a special needs individual who is, or who may in the future be, receiving Medi-Cal, SSI, or other government benefits. Unfortunately, we frequently see clients, usually on SSI, who must establish a first-party SNT because they are receiving an inheritance. This invariably could have been avoided if the person who left the inheritance had established a third-party special needs trust for that share of their estate intended to go to the special needs beneficiary.
What Parents Need To Know About CA Special Needs Trusts:
What Assets Go Into a California SNT and How is it Accessed?
Owning a home, a car, furnishings, and normal personal items does not affect eligibility for SSI or Medi-Cal. But other assets, including cash in the bank, will disqualify your loved one from benefits. For example, if you leave your special needs child $10,000 in cash, that gift would disqualify him or her from receiving SSI or Medi-Cal.
The way around disqualification of course, is to create a third-party special needs trust. Then, instead of leaving money or property directly to your loved one, you leave it to the special needs trust. This SNT can basically hold, or be the recipient of, any kind of asset. The trustee of the SNT can then turn around and buy goods or services for your special needs beneficiary.
When you choose someone to serve as trustee, that trustee will have complete discretion over the trust property and will be in charge of spending money on your loved one's behalf. Because your special needs beneficiary will have no control over the money or property, SSI and Medi-Cal administrators will ignore the trust property for program eligibility purposes. The trust ends when it is no longer needed, most commonly at the beneficiary's death or when the trust funds have all been spent.
Can I create a CA Special Needs Trust with Legalzoom, Rocket Lawyer, Suze Orman, Nolo, or other Do-It-Yourself Online Software?
There is an old saying in the law, originally stated by non-other than Abraham Lincoln: “He who represents himself, has a fool for a client.” If Lincoln had lived in modern times, no doubt he would have had some strong words against the use of do-it-yourself legal software too. After all, with DIY software, a person doesn't even have the benefit of any legal training. Indeed, because of the complicated labyrinthine code sections involved and required for SNTs, most do-it-yourself online software companies do not dare attempt to offer such documents to the public. But for your edification, here is a quick rundown, of the companies and what they do and do not offer:
Legalzoom will tell you how to apply for an SS-4 with the IRS in order to begin a SNT for the benefit of a special needs child. However, they do not specifically offer the services or documents to create “First” party special needs trusts or “Third” party special needs trusts.
Rocket Lawyer does not offer any Special Needs Trust services or documents.
This is what Nolo has to say about SNTs:
“Will You Need a Lawyer? Some lawyers will tell you that only an attorney can draft a special needs trust. But you can create a special needs trust yourself, with the right guidance.” (This last sentence pretty much says it all.) They then go on to explain that complicated and state-specific rules apply to these kinds of trusts...”
Nolo (disappointingly) is the one company that offers a template where you can draft a SNT.
Suze Orman does not offer the software for writing a Special Needs Trust. She refers to a personal contact (an Estate Planning Attorney) that she works with and says to contact them because SNTs have particulars and should be written under the advice of an Attorney.
So, out of the largest do-it-yourself legal companies, only one: Nolo, offers SNT template documents. But even they say, you need the “right guidance” in order to prepare the document itself. In other words, it's pretty clear that a consumer cannot hope to create a Special Needs Trust correctly online. In truth, only an estate planning attorney, well versed in special needs planning is capable of creating a comprehensive, specific, and tailored Special Needs Trust.
Does the Affordable Care Act render Special Needs Trusts Irrelevant?
No. New law under the Affordable Care Act (ACA) substantially helps families with younger as well as adult special needs children. For example, people with disabilities will benefit immensely in terms of health care coverage because pre-existing conditions cannot preclude one from coverage. In the past, people with disabilities had been excluded from accessing private insurance primarily because of pre-existing conditions. Plus, health insurers now have annual out-of-pocket limits to protect families’ incomes against the high cost of health care services. The Affordable Care Act also eliminates old law which permitted annual or lifetime caps on insurance coverage. All of the above are huge positive game changers for people with special needs.
But despite the fact that a person can now obtain private health insurance, most attorneys and financial advisers agree, that this factor alone should not impact the decision whether or not to create a special needs trust. Besides specific medical care, many of the services available to people with special needs are accessed through eligibility for public benefits. Besides health care, other services include housing, vocational training, day programs, as well as the all important Supplemental Security Income (SSI) benefit, are all paid solely to, and for, special needs persons who pass certain means-tested eligibility requirements (generally speaking, for a single person, he or she is limited to having $2,000 or less).
By utilizing a SNT, special needs beneficiaries preserve eligibility for Supplemental Security Income (SSI), which is often that person’s only access to income. SSI provides cash to aged, blind and disabled people to help them meet basic needs for food, clothing and shelter. SSI is also the key to enabling special needs persons obtain other government benefits. Without a SNT, SSI and other public benefits (besides the health care benefits under the ACA), would be lost for most special needs persons.
A family member looking to provide for a loved one with a disability should always consider using a SNT, as it offers the most protection. In addition, families must communicate effectively about their intentions to anyone thinking of providing for a loved one with a disability, especially grandparents.
Plus, parents should save more for their child with a disability regardless of their decision to use a trust or not. There is a huge misconception that since the person with a disability should not have assets in his or her name that families should not save and should rely solely on public benefits. The point of a SNT is to allow the person with the disability to be on means-tested government benefits but still get “extras” that family members want their loved ones to have.
When you save for a child without a disability, you are typically saving to get that child through college or graduate school, and maybe a wedding. For a child with a disability, a parent needs to plan to pay for items or services for a lifetime.
Also, as of 2014, it is important to factor in the new Affordable Care Act changes that apply to SNTs. As a practical matter however, for most special needs persons, even though the ACA makes their “medical” life better, it does not negate the need for creation of a (third-party) Special Needs Trust.
Every special needs child is different and every family is unique, but there are some common concerns and situations that link parents of challenged children, including getting appropriate accommodations and care; promoting acceptance in the extended family, school and community; planning for an uncertain future; and adjusting routines and expectations. Parents of children with special needs are often more flexible, compassionate, stubborn and resilient than other parents. They have to be.
Hopefully, the information provided here makes special needs trusts a little easier to understand for families with special needs loved ones.