Families with special needs members often face unique financial challenges, such as how to financially support their loved one without jeopardizing their eligibility for government benefits. This challenge can be met by setting up a special needs trust (SNT), which provides responsible and secure planning for their care and trust administration. In California, this type of trust is regulated by specific laws and regulations. In this blog, we will unpack the details of special needs trusts and why they are essential for the overall well-being of people with disabilities living in California.

What is a Special Needs Trust?

A special needs trust is a legal instrument that allows people to financially provide for their disabled beneficiaries without interfering with or voiding their eligibility for government benefits such as Supplemental Security Income (SSI), Medicaid, or vocational rehabilitation. The trust is usually created by a third party, such as a parent or grandparent. The beneficiaries of a Special Needs Trust are usually disabled individuals with chronic physical or mental conditions or terminal illnesses. The trust is structured to manage and distribute funds that supplement and improve the beneficiary’s quality of life.

Types of Special Needs Trusts

There are three main types of special needs trusts in California: first-party, third-party, and pooled trusts. First-party trusts are self-settled, which means that the beneficiary funds the trust with their assets – usually settlement or litigation proceeds, inheritance, or life insurance benefits. Third-party trusts, as earlier noted, are set up by a third party for the benefit of the disabled beneficiary and are usually funded by the assets of the third party. Pooled trusts combine assets from multiple beneficiaries, and the financial institution that manages the trust pools funds for investment purposes. Each of these trusts has unique rules and regulations, which California law heavily regulates.

Requirements for Establishing a Special Needs Trust in California

Special Needs trusts compliance with California laws and regulations is essential for avoiding financial and legal repercussions that can endanger the beneficiary’s benefits. A California trustee must manage the trust, and the trust can only cover supplemental expenses, not primary care, food, or shelter expenses. The trust must also be designed to comply with federal and state laws and regulations, and the person or institution managing the trust must be knowledgeable about both. The court must also review the trust to ensure that it is legally compliant and fulfills the beneficiary’s needs.

Benefits of a Special Needs Trust 

The primary benefit of a special needs trust is that it allows individuals with disabilities to receive gifted assets without jeopardizing their eligibility for government assistance programs. It also assures that their funds are used for their intended purpose and protects their assets. Furthermore, it provides family members with peace of mind knowing that their disabled loved one’s financial future has been secured.

Creating a Special Needs Trust can be a complicated and emotional process for families, but it is a necessary step for safeguarding disabled beneficiaries and protecting assets. The trust gives confidence and comfort to the beneficiary and their family members, knowing that their future is secure. California law regulates these trusts to ensure legal compliance and the needs of disabled beneficiaries are met. We highly recommend that California residents, who have loved ones with special needs, speak with an experienced California estate planning attorney to explore the establishment of a special needs trust.