Protect Your Disabled Child or Grandchild’s Future: California Third-Party Special Needs Trust

If you have a disabled child or grandchild, it is important for you to know how you can help to provide for them as an adult without causing them to lose government benefits that help with their medical and living expenses. Government benefits such as Supplemental Security Income (SSI), Medi-Cal, In-Home Support  Services (IHSS) and HUD housing assistance can be a godsend to California residents with special needs. But you could inadvertently cause your disabled family member to lose part or all of their benefits.  

If you give your disabled family member a gift of money or assets either while you are alive or in your will or trust, you could render them ineligible for government services they desperately need. And the money you give them could disappear to medical costs, perhaps in a matter of months. Why? Disabled persons are only eligible for government services like Medi-Cal if they have assets or income that do not exceed state and federal requirements under the law.  And once they are deemed ineligible, it may be very difficult for your family member to be reinstated once the money you gave them is gone.  

Does this mean you must disinherit your child or grandchild so they can use the government benefits they need? Not at all. A good California estate planning attorney can set up a Special Needs Trust (SNT) to enable you to provide for your disabled child or grandchild without the fear they will lose important government benefits.  

What Is a Special Needs Trust?

A Special Needs Trust, sometimes referred to as a Supplemental Needs Trust, enables a disabled person to remain eligible for government benefits, despite having assets that would otherwise make them ineligible. The trick is to place assets in a Special Needs Trust rather than giving them directly to your family member. If assets are placed in a properly set up Special Needs Trust, they simply do not count as the property of the disabled person for determining their eligibility for government benefits.  

Are All Special Needs Trusts the Same?

There are two basic types of SNTs, first-party SNTs and third-party SNTs. We are going to focus today on third-party SNTs, but here is the basic difference.    

  • First-party SNTsare funded with assets that belong to the trust beneficiary – such as proceeds from a lawsuit settlement.  They have different requirements than a third party SNT. But that’s a discussion for another day. 
  • Third-party SNTs are funded with assets that belong to a third person, typically a parent or grandparent. Assets belonging to the beneficiary may not be transferred to a third party for purposes of setting up a third-party SNT.  

One of the big advantages of a third-party SNT over a first-party SNT, is that the Department of Health Care Services (DHCS) cannot demand payback for benefits upon the beneficiary’s death even if there is still a substantial sum remaining in the SNT. Upon the death of the beneficiary, another beneficiary may be designated. 

Medi-Cal and SSI Countable Asset Limits

Medi-Cal is California’s customized implementation of Medicaid. It’s meant to help people with low incomes get care. Medicaid is a federal program subject to federal laws. though it is administered by the states which have their own additional requirements. Medi-Cal has various requirements including countable assets and income.  

A single Medi-Cal or SSI recipient is only permitted to have up to $2,000 in countable assets under the law before they are rendered ineligible. It’s $3,000 for couples. So, it’s not much. But you may place assets in a Special Needs Trust to be used for the benefit of your disabled family member without them being counted against this dollar limit.  

Absent a Special Needs Trust, a disabled person could lose their SSI and Medi-Cal benefits if they receive a gift, inheritance or even a personal injury settlement that pushes their countable assets above the $2,000 limit.  

What Is a Countable Asset?

Countable assets are those that must be included to determine your eligibility for Medicaid under federal law. Assets that are not “countable” include (among other things) 

  • Principal residence 
  • One motor vehicle    
  • Property used in a trade or business 
  • Household items 
  • Work-related pension plans 

Countable assets are similar for Social Security Income (SSI). 

Who Can Fund a Third-Party Special Needs Trust?

Usually it’s parents or grandparents who fund third-party Special Needs Trusts, but really anyone but the beneficiary can contribute funds. This may be done by paying money into the trust while they are alive, by designating the trust in their will or by making a life insurance policy payable to the trust.  

How May the Money in a Special Needs Trust Be Used?

The money in a Special Needs Trust is supposed to be used for needs not covered by government benefits. It is a supplement to those benefits. If trust money is used for food or housing, it may result in a deduction or even a loss of SSI, Medi-Cal or other benefits. The safest route is to spend the money on things that may not be redeemed for cash and that are not for food or shelter. For example, spending the money on computer equipment, education, vacations and leisure activities, or supplemental medical care is fine.  It is best to consult with a qualified California estate law attorney if in any doubt.  

Why do Special Needs Trusts Get Around Government Benefits Requirements?

Though the beneficiary receives value from a Special Needs Trust, they do not have control of the money. To avoid benefits being reduced or cut completely from Medi-Cal, SSI, IHSS and HUD housing assistance programs, the SNT must indicate that  

  • The trustee has control of how and when the money is spent 
  • The trust’s primary purpose is to supplement the support and services the beneficiary receives from government benefits, and 
  • The beneficiary has no control of the assets in the trust and cannot give away or sell their rights under the trust  

If this was not already clear from our definition of a third-party trust earlier, the assets in the trust must never have belonged to the beneficiary. The beneficiary cannot put their own money into a third-party SNT, and if someone wills money or assets directly to the beneficiary rather than the third-party SNT, the beneficiary cannot then put the assets into the trust.  

Wording and details are important for a Special Needs Trust to serve its purpose of protecting a disabled person’s benefits. This is not a do-it-yourself project. You need a very experienced California estate attorney to create the SNT. 

Who Can Be the Trustee of a Special Needs Trust?

The person who creates the trust names the trustee. Often, the creator is a parent or grandparent who names themselves as trustee. If that is the case, they will want to consult with a good California estate lawyer, so they do not violate the trust and cause a reduction or loss of the beneficiary’s government benefits.  

The trust creator may also choose a professional trustee who already has the knowledge they need to properly administrate the trust. In this case, the creator can appoint themselves or other family members to act as “trust advisors” who can replace the trustee if they are not satisfied with their services.  

Don’t Wait Until it is Too Late!

This is just a quick and broad overview of third-party Special Needs Trusts. If you have a disabled family member, consult an experienced California estate lawyer concerning the best ways to protect them going into the future. Call the Law office of Jason G. Pink, for a free consultation. Jay Pink has years of experience in estate planning, trusts and business law. Call or text us at (209) 694-3085 or email us at jay@JPinkLaw.com to schedule your free consultation. 

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top