What is a Special Needs Trust?

A special needs trust is designed to provide for the beneficiary while preserving public benefits for Medi-Cal, Supplemental Security Income (SSI), and/or other means-tested programs. It may be a stand-alone document, or it can form part of a revocable trust or a will.

You may want a special needs trust as part of your estate plan if you have a child or other beneficiary who receives Medi-Cal or SSI, and if the receipt of funds would make that person ineligible for public benefits. The terms of the special needs trust allow the trustee to purchase goods and services for the beneficiary that are not otherwise provided by public benefits, while prohibiting distributions from your estate that would cause the beneficiary to be ineligible for public benefits.

There are two general categories of special needs trust: self-settled trusts and third-party trusts.

What is a self-settled special needs trust?

A self-settled special needs trust is funded with the beneficiary’s own funds. This type of self-settled trust may be appropriate to preserve public benefits when a Medi-Cal or SSI beneficiary, who is under 65 years of age, receives a windfall, such as an inheritance or a personal injury award.

A self-settled special needs trust may be created by a beneficiary’s parent, grandparent, or the court. It must provide that on the death of the beneficiary, any funds remaining in the trust are first used to repay the state for Medi-Cal benefits that were provided to the beneficiary. Such a provision is often called a payback provision.

What is a third-party special needs trust?

A third-party special needs trust can be established by one person for the benefit of another. For example, parents may establish third-party special needs trusts for the benefit of their developmentally disabled or mentally ill children, who receive or may receive means-tested public benefits such as Medi-Cal or SSI.

A trustee has complete discretion regarding distributions from the trust, not the beneficiary. For this reason, the trust principal and income usually is not counted against the beneficiary’s eligibility for public benefits.