Practice area
An inheritance can cost a disabled beneficiary the benefits they depend on.
Means-tested programs like SSI and Medi-Cal have eligibility rules that a well-meaning gift can break overnight. A special needs trust lets you provide for someone without displacing the support they already have.
Preserves eligibility
Protects SSI and Medi-Cal while still providing support.
Third-party
Funded by family; no Medi-Cal payback.
First-party
Holds the beneficiary's own funds; payback applies.
Trustee discretion
Distributions must be managed against benefit rules.
The problem it solves
Leaving money directly to a person receiving needs-based benefits can disqualify them. The inheritance is counted, benefits stop, and the funds are spent down on care that was previously covered, often exhausting the gift and leaving the person to requalify from nothing.
Disinheriting them to avoid this is the other common response, and it usually means relying on a sibling's informal promise, which carries its own well-documented failure modes: divorce, creditors, and death.
Third-party versus first-party
A third-party special needs trust is funded with someone else's money, typically a parent's or grandparent's. It has no payback requirement, so whatever remains at the beneficiary's death passes to whomever you named. This is the trust used in ordinary estate planning, and it should be built into the plan before any inheritance is left.
A first-party trust holds the beneficiary's own money, usually from a personal injury settlement or an inheritance that arrived unprotected. It is subject to a Medi-Cal payback at death. Both are legitimate; which one applies depends entirely on whose money it is.
What the trust can pay for
The trustee makes discretionary distributions for things public benefits do not cover: education, travel, therapies, equipment, technology, a companion, recreation. What the trustee should not do is hand cash directly to the beneficiary or pay for food and shelter without understanding how those distributions are treated.
Trustee selection matters more here than almost anywhere else, and coordinating the trust with an ABLE account is often worth considering.
Common questions
Special Needs Trusts
Can I just leave the money to a sibling to manage informally?
You can, and it is a common arrangement that fails in predictable ways. Those funds belong to the sibling: they are reachable by the sibling's creditors, divisible in the sibling's divorce, and pass under the sibling's own estate plan if they die first. None of that is a comment on the sibling's character.
What is an ABLE account and do we still need a trust?
An ABLE account is a tax-advantaged savings account for people whose disability began before a statutory age. It is useful and often complementary, but it has annual contribution limits and a balance ceiling, so for a meaningful inheritance it supplements a trust rather than replacing it.
When should this be set up?
Before there is anything to protect. A third-party special needs trust written into your plan now costs a fraction of fixing an inheritance that has already landed in the beneficiary's name.
Related
Other areas of the practice
Talk it through with an attorney.
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