Special Needs Trust

A special needs trust ("SNT") is a vehicle which allows a parent (or other individual) to accumulate wealth for the benefit of an individual with special needs, without jeopardizing the beneficiary's eligibility for government assistance.

In order to qualify for certain needs-based government benefits, such as SSI (Supplemental Security Income) and Medi-Cal, strict income and asset requirements must be met. Receiving a gift or an inheritance can result in a reduction in government benefits or complete loss of eligibility for such assistance. Rather than gifting directly to a loved one with a disability, assets can be placed in a special needs trust for the benefit of such loved one, thereby preserving public assistance.

Public programs and government assistance provide only for the bare necessities of life, such as food and shelter. A special needs trust is designed to meet the supplemental needs of the beneficiary - those needs beyond food and shelter. Government benefits combined with assets held in a special needs trust can help to ensure our loved ones with disabilities have the resources available to ensure they are well provided for in our absence.

In general, there are three types of special needs trusts: (1) a third party special needs trust; (2) a first party special needs trust; and (3) a pooled special needs trusts.

Third Party Special Needs Trust

A third party SNT is created and funded by a “third party” - someone other than the individual with a disability. Most often this type of trust is created by parents or grandparents of a child with a disability or special needs. A third party SNT is an ideal estate planning vehicle for parents or others who want to leave an inheritance to a loved one with special needs.

A third party SNT can be a testamentary trust or a “stand-alone” trust.

  • A testamentary trust is a trust does not come into existence until the death of the parent or grandparent (or grantor/creator of the trust). It is created under the parent's or grandparent's Will or revocable living trust. Because it does not come into existence until after the death of the grantor/creator, it cannot be funded during the lifetime of the grantor/creator. In addition, it cannot be used to hold gifts or an inheritance from another relative or friend if that relative or friend predeceases the person creating the testamentary SNT
  • A stand-alone trust is a separate trust created during the lifetime of the parent or grandparent (or grantor/creator). It is not created within a revocable living trust or Will; it is created separately. Unlike a testamentary SNT, a stand-alone SNT can be funded during the lifetime of the parent or grandparent (grantor/creator). In addition, other friends or relatives can contribute to the SNT during life or upon death, eliminating the need to create a separate SNT.

First Party Special Needs Trust

First Party Special Needs Trust (Self-Settled Special Needs Trust): A first party SNT is funded with the assets of a person with a disability. It is a special type of special needs trust authorized under federal law at 42 U.S.C. § 1396p(d)(4)(A). First party SNTs are most commonly utilized when an individual with a disability has received a settlement from a personal injury action or an inheritance from a well-meaning person who did not understand that such a gift could disqualify the beneficiary from important government assistance. A first party SNT can also be used to hold property or alimony awarded in a divorce proceeding.

A first party SNT, also commonly referred to as a d(4)(A) trust, a litigation trust or a payback trust, can only be created by the parent, grandparent, or guardian of the individual with the disability, or by the probate court. The provisions of a first party SNT are more restrictive than those of a third party SNT. In addition, the beneficiary must be under the age of 65, the trust must be irrevocable and, upon the death of the beneficiary, any funds remaining in the trust must be used to repay the State of California for certain medical payments made during the lifetime of the beneficiary.

Pooled Special Needs Trust

A pooled special needs trust is also funded with assets that are owned by the trust beneficiary. If the settlement or inheritance a person receives is small, a first party SNT may not be the best solution, especially if there is no parent, grandparent or legal guardian available to establish the trust. Pooled trusts are established and managed by nonprofit organizations. The assets in the trust are pooled together for investment purposes, but the nonprofit organization manages a sub account for each beneficiary.

If there are any funds remaining in the trust after the death of the beneficiary, the remaining funds must be paid to the State of California or to the charity to assist it in accomplishing its charitable mission. Pooled trusts can be useful when there are no persons available to serve as trustee or the beneficiary has a strong desire to benefit the sponsoring charity.

Contact Info

Law Office of Lorna J. Drope
Santa Clara County
1550 The Alameda
Suite 206

San Jose, CA 95126

Phone: (408) 852-7005
Fax: (408) 899-4485