A special needs trust (SNT) and a regular irrevocable trust are both powerful estate planning tools, but they serve distinctly different purposes and operate under different rules, primarily concerning the beneficiary and the use of trust assets. While a regular irrevocable trust is designed to remove assets from the grantor’s estate for estate tax purposes and provide for beneficiaries with general financial needs, a special needs trust is specifically tailored to benefit an individual with disabilities without jeopardizing their eligibility for crucial government benefits like Supplemental Security Income (SSI) and Medicaid. Understanding these differences is vital for families seeking to provide long-term care and financial security for a loved one with special needs, as improper structuring can have serious consequences, potentially disqualifying the beneficiary from essential aid.
What happens if I just leave money to my disabled child in a regular trust?
Leaving assets to a person with disabilities in a standard irrevocable trust can inadvertently disqualify them from receiving essential needs-based government assistance. This is because SSI and Medicaid have strict asset limitations; if a beneficiary directly receives funds or assets exceeding these limits—currently around $2,000 in countable assets for SSI in 2024—their benefits will be suspended or terminated. For example, if a parent passes away and leaves $50,000 to their adult child with disabilities in a typical irrevocable trust, that child would immediately lose their SSI and Medicaid eligibility. Approximately 66% of individuals with disabilities rely on government assistance for basic needs, and this assistance can be crucial for covering medical expenses, housing, and daily living costs. A standard irrevocable trust distributes assets directly to the beneficiary, which creates a problem for needs-based programs.
Can a special needs trust hold more than just money?
A special needs trust is specifically designed to hold assets for the benefit of a person with disabilities *without* impacting their eligibility for public benefits. This is achieved by structuring the trust so that the beneficiary does not have direct access to the trust principal. Instead, a trustee manages the funds and uses them to supplement—not replace—government benefits, covering expenses like specialized equipment, therapies, recreation, travel, and other quality-of-life improvements not covered by SSI or Medicaid. It can hold a variety of assets, including cash, stocks, bonds, real estate, and personal property. In California, the maximum amount that can be contributed to a first-party SNT (funded with the beneficiary’s own funds) is capped at the amount needed to supplement benefits, but there isn’t a strict limit on the amount contributed to a third-party SNT. Properly drafting the trust document is essential to ensure it meets all legal requirements and aligns with the beneficiary’s specific needs.
I’ve heard about “first-party” and “third-party” special needs trusts, what’s the difference?
There are two primary types of SNTs: first-party (also known as self-settled) and third-party. A first-party trust is funded with the *beneficiary’s own* assets – for example, from an inheritance or a legal settlement. These trusts are subject to “payback” provisions, meaning that upon the beneficiary’s death, Medicaid can recover any funds remaining in the trust to reimburse the government for the benefits they received. Third-party SNTs, however, are funded with assets from someone *other* than the beneficiary – typically parents or other family members. These trusts do not have payback provisions, and any remaining funds can be distributed to alternate beneficiaries according to the trust’s terms. I recall a family who came to me after a tragic accident left their son with significant disabilities and a substantial legal settlement. They were understandably anxious about preserving those funds for his long-term care without jeopardizing his benefits. We established a carefully structured first-party SNT, ensuring that he received the care he needed while protecting his eligibility for vital government assistance.
What happened when my friend’s sister didn’t plan properly?
My friend, Sarah, faced a heartbreaking situation when her sister, Emily, passed away unexpectedly, leaving a significant inheritance to her teenage son, Michael, who had cerebral palsy. Michael was receiving SSI and Medicaid, but the inheritance—though intended to improve his quality of life—immediately disqualified him from those essential benefits. Sarah and her family were devastated, struggling to navigate the complex legal and financial challenges. They spent years trying to find a way to preserve some of the inheritance while reinstating Michael’s benefits, facing significant legal fees and emotional distress. The situation highlighted the critical importance of proactive estate planning for families with special needs. Luckily, after consulting with an attorney, they were able to create a pooled special needs trust and transfer some of the funds, but a large portion was lost due to legal fees and the loss of benefits during the transition.
Fortunately, the lessons learned from Sarah’s experience prompted her to seek legal counsel for her own estate plan. Together with Steve Bliss, we established a third-party special needs trust for her daughter, ensuring that any future inheritance would be protected and used to supplement her daughter’s care without impacting her benefits. We meticulously crafted the trust document, addressing potential issues and outlining clear guidelines for the trustee. This proactive approach gave Sarah peace of mind, knowing that her daughter’s future was secure, and her wishes would be honored. It’s a powerful reminder that with careful planning and the right legal guidance, families can navigate the complexities of special needs estate planning and create a brighter future for their loved ones.
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About Steve Bliss at Escondido Probate Law:
Escondido Probate Law is an experienced probate attorney. The probate process has many steps in in probate proceedings. Beside Probate, estate planning and trust administration is offered at Escondido Probate Law. Our probate attorney will probate the estate. Attorney probate at Escondido Probate Law. A formal probate is required to administer the estate. The probate court may offer an unsupervised probate get a probate attorney. Escondido Probate law will petition to open probate for you. Don’t go through a costly probate call Escondido Probate Attorney Today. Call for estate planning, wills and trusts, probate too. Escondido Probate Law is a great estate lawyer. Affordable Legal Services.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Estate Planning Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
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Services Offered:
- estate planning
- bankruptcy attorney
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Map To Steve Bliss Law in Temecula:
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Address:
Escondido Probate Law720 N Broadway #107, Escondido, CA 92025
(760)884-4044
Feel free to ask Attorney Steve Bliss about: “What professionals should be part of my estate planning team?” Or “Is probate public or private?” or “How do I fund my trust with real estate or property? and even: “What is the bankruptcy means test?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.