Special Needs Trusts

Special Needs Trusts (SNT) are designed for disabled beneficiaries so as not to interrupt their Medi-Cal and/or S.S.I. benefits. These Trusts are ESSENTIAL for this purpose and some implementation for their arrangement should be provided for in the Family/Living Trust.

Because of their technicality and usefulness in allowing a disabled beneficiary to continue to receive their benefits, I utilize a “stand alone” SNT and do not incorporate it in the Family/Living Trust which serves other purposes. For one reason, it is an Irrevocable Trust while the Family/Living Trust is a revocable Trust. Another reason to make it a Separate Trust is the State of California may want to review the SNT to determine if it meets state and federal standards. I don’t want my clients’ personal information, assets, distributions and beneficiaries to become part of the state’s knowledge and records. That would be the case if the SNT was made part of the Family/Living Trust.

There are two types of SNTs – a First Party Trust and a Third Party Trust. Most of the SNTs I draft are Third Party SNTs. There is an important difference in the two which has to do with who gets the ultimate remainder of the Trust after the death of the disabled beneficiary.

Third Party SNT: In this case, the inheritance to the disabled child or beneficiary comes from a Third Party, usually the parent or grandparent. For example in the Family/Living Trust there would be a share of the distribution directly to the SNT. As a result, the disabled child or beneficiary would never have possession or control over his/her share of the inheritance. This is a good thing. As a result, the Creator of the SNT, the parent, grandparent or some Third Party, can designate who gets the remaining assets or funds in the SNT after the death of the disabled beneficiary, which is usually other family members.

First Party SNT: This SNT arises when a disabled beneficiary receives an inheritance or funds personally and title to such inheritance is transferred from the disabled beneficiary to the SNT. Hence, a First Party SNT. Most of these SNTs are scrutinized closely by the state and some are created by Court order. The problem with these Trusts are that the State of California or any other state who has rendered benefits to the disabled beneficiary must be designated as the Primary Beneficiary after the death of the disabled beneficiary. If anything is left after the state’s claim, other family members may become beneficiaries secondary to the state.

SNTs are technical and must be carefully drafted. The disabled beneficiary has no demand rights as the Trustee has absolute discretion in providing for such beneficiary. However, it is strongly recommended in the Estate Plan if a disabled beneficiary is to receive a share of the inheritance.

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