Purpose:
The primary purpose of a Third Party Special Needs Trust is to
preserve government benefits for disabled beneficiaries. Usually the benefits
involved are from government programs that have limits on the beneficiary's assets and
income. Receipt of an inheritance will
disqualify the beneficiary for future government benefits.
Government Programs: Two
of the programs that are based on financial need are Supplemental Security Income (SSI) and Medi-Cal,
which is the California version of the Medicaid program. Housing
subsidies, also called the Section 8 program, In Home Support Services, food
stamps, and utility payment assistance are also based on financial need.
However, Social Security and Medicare are not based on
financial need, but are instead based on the applicant's age and earnings
record.
Hypothetical Example:
Suppose a couple has three adult children who will divide a $600,000 estate after
both parents have died. One of the children is receiving SSI benefits
due to a mental disability and has difficulty handling money. Because
the child
is receiving SSI benefits, the child is also eligible for Medi-Cal benefits
for his continuing medical and mental problems. This child is not given
large amounts of money by his family because he is likely to waste anything he
is given. If the couple sets up a traditional distribution plan in their
wills or trust that gives everything to their children equally, their disabled
child is likely to have major financial problems. If the child outlives
his parents, he will inherit approximately $200,000, which will increase his
assets far above the limits set by the SSI program and by the Medi-Cal
program. The child will be disqualified from those programs and will
receive no further benefits. After spending his inheritance, perhaps
within just a few months, the child will have no assets, and great difficulty
in returning to the SSI and Medi-Cal programs.
The Special Needs Trust: Instead
of leaving assets directly to the disabled adult child, the parents could
establish a Third Party Special Needs Trust in their living trust or wills. This
trust would not be under the control of the child, and the child would not be
able to revoke it and use the assets for his own purposes. The trust
would have an independent trustee and would continue for the lifetime of the
child. (This is known as a "Third Party Special Needs Trust" because the
beneficiary has no control over the trust. There are other types of
special needs trusts that are funded with assets belonging to the beneficiary,
known as Litigation Special Needs Trusts, that are not discussed here.)
A Third Party Special Needs Trust can own various assets that are used by the child, but due
to the ownership by the trust, the assets are not counted as being owned by
the child. The trust could also pay for services required by the
beneficiary, such as telephone, education, car repairs, etc., without
affecting the beneficiary's eligibility for the government programs. The
trustee, however, would not make cash payments to the child because the
payments would be counted as income for the beneficiary and could result in
reduction or loss of benefits. The trust could also own a home for the child,
thereby reducing the child's expenses for rent, although there may be some
reduction in SSI benefits as a result.
Benefits of Special Needs Trusts:
The Third-Party Special Needs Trust
has no obligation to notify the state or pay back Medi-Cal payments after the
beneficiary's death because the beneficiary did not own the assets. This
type of trust prevents the beneficiary from controlling the
assets, but also maintains a means of helping the beneficiary with the
assets held by the trust. (However, when a Litigation Special Needs
Trust is used, the state must be notified when the beneficiary dies and Medi-Cal
payments may have to be repaid to the state from the Litigation Special Needs
Trust.)
Problems with Special Needs Trusts:
When the parents' estate plan becomes irrevocable, usually
through the deaths of the parents, the special needs trust also becomes
irrevocable. If the beneficiary regains mental or physical capacity
after that point, making changes to the trust or revoking it can be difficult,
and will require court approval. Unless the beneficiary is severely
disabled and has no hope of financial survival without the government
programs, a special needs trust may not be the answer.
