You’ve done your research, your personal and family circumstances call for it. You have a loved one or a child with special needs, and you would like to be able to ensure that they are cared for long-term, even after you pass away.
So you decided that you’re ready to start a Special Needs Trust (SNT). But while you understand, broadly, what it is and what it does, you’re wondering if there are other things about SNTs you should know about.
If you’re ready to do a deeper dive into SNTs, this article will help you gain a better understanding of what type of SNT in California is best for your unique circumstancs.
The Types of Special Needs Trusts and Why It Matters
Living trusts are not one-size-fits-all. Most are uniquely tailored for each individual’s needs.
For SNTs, there are two established types – determined largely by who owns the assets that will go into the trust. So the SNT can be either a Third-Party Trust or a First-Party Trust.
Third-Party Special Needs Trust
This is the type of trust that most people think of when considering setting up a Special Needs Trust.
This type of trust is created and funded by parents, grandparents, or other family members who are looking to establish a type of estate plan that will also provide long-term and sustainable care for family members with a disability or special needs.
It is considered a third-party trust because the trust is established by someone other than the beneficiary and the trustee. Once the trust is created and funded by the third-party, and the assets are transferred to the trust, they are, at least respective to the trust, a third party.
One of the core benefits of a third-party special needs trust is what happens after the beneficiary passes away. Since the beneficiary was never the owner of the trust assets, there is no Medi-Cal payback requirement. Additionally, should the beneficiary pass away, any remaining trust assets can be distributed to the rest of the family members, depending on the grantor’s instructions.
First-Party Special Needs Trust
By contrast, and as the name itself would imply, a First-Party SNT is a type of trust where the assets funding the trust belong to the beneficiary himself.
This type of trust can be an important rescue tool should the beneficiary ever receive properties or assets that might disqualify them from government aid benefits.
A beneficiary can be the recipient of several types of unexpected assets, such as an inheritance, a personal injury settlement, or a medical malpractice award. Or the beneficiary himself might already have personal savings and assets under their name.
The problem is that most government benefits usually look at the value of the person’s assets and properties to determine eligibility to programs such as the federal Supplemental Security Income (SSI) or California’s Medi-Cal. If the beneficiary should suddenly come into a great deal of money, he might find himself losing access to needs-based programs he needs.
If those assets are placed in a trust, their value will not be considered in determining eligibility.
In addition, those assets will be put to good use in providing long-term support and care for the beneficiary, in addition to any government aid he qualifies for.
The unfortunate probable alternative is that the person receives a large amount of assets, he is rendered ineligible for government aid programs, and soon enough those assets will become depleted if used for any medical or health care needs, including daily living costs.
The crucial difference between the First-Party SNT and a Third-Party SNT is that in a First-Party SNT, should the beneficiary pass away, the trust assets will be used to reimburse Medi-Cal benefits paid on the beneficiary’s behalf during their lifetime. Only once those liabilities are settled can any remaining trust assets, if any, be distributed to other beneficiaries or the beneficiary’s heirs, depending on the terms laid out in the trust instrument.
The HEMS Trap and Distribution Rules for SNTs
Most trusts established for the benefit of minor beneficiaries usually have built in rules that instruct the trustee to utilize trust assets for the beneficiary’s Health, Education, Maintenance, and Support (“HEMS”). For minors especially, these are in place until certain pre-determined conditions are met – they reach a certain age or reach a certain milestone defined in the trust instrument.
One would think that the same rules of distribution of trust proceeds may also apply to SNTs. This is, however, not true.
When one uses the words “health,” “education,” “maintenance” and “support” within a SNT trust document, it gives the implication that the trust is mandated to pay for the beneficiary’s food and shelter – the very same things that government aid programs are supposed to assist with. This can be disastrous because it can cause the beneficiary’s loss of eligibility to these programs.
Those seeking to put together a trust instrument for an SNT should keep in mind that the trust is designed to supplement, not replace, government benefits.
To that end, an SNT can shoulder other costs such as:
- Specialized medical therapies and adaptive equipment
- Educational expenses and vocational training
- Recreation, travel, and hobbies
- Personal care services
- Electronics
- Transportation
- Clothing and other items that improve quality of life
The difference between these items vs. HEMS might be a bit hard to delineate, which is why it is crucial that the trust instrument of an SNT be drafted by a family trust lawyer versed in the nuances of the applicable regulations and legal terminologies.
In fact, throughout the trust administration process, trustees of an SNT would find it helpful to coordinate distributions with the assistance and counsel of a family trust lawyer, to ensure that all trust-related payments align with the overall financial and special needs requirements of the beneficiary.
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If you are considering a Special Needs Trust for a family member, we can help you determine which type best fits your circumstances and develop a plan that protects both your loved one’s financial future and their access to vital public benefits. Reach out to us today and we can help clarify your options.