Special Needs Trust, sometimes called a supplemental needs trust, is a trust that is created and designed to hold property of beneficiaries who are disabled or mentally ill so they can enjoy the use of the property and still qualify for needs-based public benefits. Supplemental Security Income (SSI) and Medicaid (which in California is called “Medi-Cal”) are the more common needs-based public benefits which Special Needs Trusts are created to protect.

A key to maintaining eligibility for needs-based public benefits is that the beneficiary cannot have control over the assets in the Special Needs Trust (SNT). The beneficiary cannot manage the assets, has no right to demand receipt of income or property from the SNT, and has no power to name the manager of the trust (known as the trustee) or to change the terms. The use of the SNT’s assets for the benefit of the beneficiary is determined at the discretion of the trustee of the SNT. The trustee can be a family member, friend, or private professional trustee.

Special Needs Trusts are frequently created to hold an inheritance or the proceeds from personal injury litigation. However, a SNT may be created to hold assets derived from other sources.

First Party Trusts

When a beneficiary is entitled to assets, as by inheritance or litigation proceeds, the SNT is referred to as a “first party” SNT, created specifically for the one beneficiary. Federal law requires that these individual first party SNTs be established by a parent or grandparent of the beneficiary or by a Court. These first party SNTs are sometimes referred to as (d)(4)(A) trusts, being named after the federal statute which authorizes their creation.

There is another kind of first party SNT, referred to as a “pooled” SNT, or sometimes a (d)(4)(C) trust. These are trusts established by a non-profit corporation. A beneficiary of a pooled SNT joins the existing pooled SNT. There are multiple beneficiaries of the pooled SNT, each with his or her own account. The pooled SNT will already have a trustee, an investment company, and an administrator. Only certain persons are permitted to sign up the beneficiary for a pooled SNT; these are the beneficiary (if competent), a parent, a grandparent, or a Court.

When a SNT is a first party SNT, it must provide that any assets remaining in the SNT will first pay back the State for medical assistance before going to remainder beneficiaries.

Additionally, in California, when a Court order authorizes or establishes the SNT and directs that a disabled person’s assets be transferred to the SNT, ongoing Court supervision of the SNT is required (with rare exceptions). This supervision may include certain protections such as a bond for the trustee, accountings to the Court, Court approval of fees paid from the SNT to the trustee and to the trustee’s attorney, etc. All of these protections increase the cost of administering the SNT.

Third Party Trusts

Many of the restrictions of a first party SNT can be avoided if a person wishing to make a gift or leave an inheritance to a person on needs-based public benefits does appropriate estate planning. If the gift or inheritance is left not outright to a needs-based public benefits beneficiary, but to the trustee of an SNT for the beneficiary, the SNT is referred to as a “third party” SNT. At termination the SNT is not required to pay back the State for medical assistance. The SNT will not have to be established by a parent, grandparent or Court. If Court involvement can be avoided, the added cost of bond premiums, filing fees, Court accountings, and related costs are also avoided.

So, if a relative or friend of a disabled person wants to benefit the person with a gift or inheritance, the relative or friend should determine whether the disabled person is, or is likely to be, on needs-based public benefits. If so, the relative or friend should seek legal advice regarding the best way to benefit the disabled person. However, if a person on needs-based public benefits is due an inheritance outright, or will receive money from litigation proceeds, a first party SNT may be the answer to keeping his or her public benefits and maintaining the inheritance or litigation proceeds as a resource to supplement public benefits. Consult a qualified attorney for advice regarding these matters.