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Q: What is a special needs trust?

A: A special needs trust is a tool that can hold assets for the benefit of a disabled person, without those assets counting as the property of the disabled person. This is important, as Medi-Cal and SSI rules allow a beneficiary to possess no more than $2,000.00 of countable assets. Assets in a properly drafted special needs trust can provide supplemental benefits for an individual without counting against this $2,000.00 limit. A disabled individual can accordingly be a named beneficiary of the special needs trust and also continue to receive benefits under Medi-Cal and SSI. Without a properly drafted special needs trust, the receipt of an inheritance, personal injury settlement, or gift would cause an SSI or Medi-Cal recipient to lose their eligibility for benefits.

Q: What can a special needs trust pay for?

A: Depending on its terms, a special needs trust can pay for anything. The problem is not what the trust can do, but how the SSI and Medi-Cal programs will treat the receipt of income by the beneficiary. It is almost never a good idea to give cash, or anything that can be converted to cash, directly to the beneficiary. For every dollar given above $20, this type of distribution will generate an equivalent dollar reduction in benefits. Depending on the amount of cash given to the beneficiary, this could result in a complete loss of benefits. Purchases of food and shelter, known as In-kind Support, or "ISM" are also problematic. They can result in deductions in monthly benefits, or even complete loss of SSI or Medi-Cal coverage. The method of computing the penalty for ISM, however, can create circumstances where payment of rent, for example, can be quite advantageous. Whether payment for food, rent or other ISM is advisable or not will depend on the facts of each particular case, and should not be attempted without advice from a person or professional familiar with the ISM rules. The safest use of special needs trust funds is to purchase things or experiences for the beneficiary that are not redeemable for cash, and are not food or shelter (ISM). This is always permissible and, if properly done, does not result in any deductions. Such distributions are the heart of most special needs trust administrations. Examples are a computer; television or other household electronics; furniture and furnishings; books, CDs, DVDs; supplemental medical care or therapy; travel and entertainment; recreational activities; memberships… in short, the special items and experiences beyond the basics that bring enjoyment to our lives.

Q: Who acts as the trustee in a special needs trust?

A: The person creating the trust gets to name the trustee and any successor trustees as well. Often parents and family members establishing a special needs trust want to be trustee until they are no longer able. This works well if they learn the SSI and Medi-Cal income and asset rules, or seek advice from their Special Needs Attorneys or other professional familiar with the rules of the benefit programs. Many, however, prefer using professional trustees with the required knowledge. Such trustees can safely administer a special needs trust, and prevent an inadvertent loss of benefits. Families opting for professionals can stay in control with a trust drafted to provide for family members acting as "Trust Advisors" or advisory "Trust Committees," with the authority to remove and replace trustees. This is often the best of both worlds: the familiarity with the disabled individual only family can provide teamed with professionals experienced in the SSI and Medi-Cal regulations. Whether to use a family member or a professional is an important choice, and we work with our clients to find the solution best for them.

Q: What are the differences between "first party" special needs trusts and "third party" special needs trusts?

A: The "first party” special needs trust is a trust established with the assets of the individual (or their spouse) who is on public benefits. A “third party” special needs trust is established and funded with the property of anyone other than the person (or spouse) on public benefits. An example of a third party trust would be a parent or other family member establishing a trust for a disabled beneficiary, and funding it with their property. The distinction is important, as the rules and restrictions are much greater for the first party trusts than they are for third party family trusts. However, if the excess assets threatening benefit eligibility are unavoidably assets owned by the disabled person or their spouse, a first party special needs trust can allow an individual on SSI or Medi-Cal who has received a windfall (inheritance, gift, personal injury settlement, etc.) to continue receiving their benefits, while also enjoying a life significantly improved by the resources of the special needs trust.

First Party Special Needs Trusts can be either a customized “D-4A” self-settled trust or a “D-4 C” pooled trust. The Federal regulations concerning the "self-settled" trusts are very detailed and technical in who can establish them, how they are established, and the required language within the trust. Circumstances may require that they be established by a Judge of the Superior Court at a formal hearing, and that they be subject to continued court supervision. Most notably, they must have a "payback provision" requiring the repayment to the State for any Medi-Cal benefits received. This repayment would apply to any assets left upon the death of the beneficiary or termination of the trust. The D4C “Pooled” trusts are qualifying first party special needs master trusts established and maintained by non-profit organizations. Rather than writing a customized trust as with the D4As, you simple “join” the master trust. While there is a loss of customization available with the D4A self settled trusts, these may be simpler and cost effective options. As a first party trust, however, they will also have a payback clause. These payback requirements for the D4A and D4C trusts notably do not apply to third party trusts. In a third party trust, the party establishing it can leave any remainder to whoever they wish, without any payback.

Third party special needs trusts are established with the assets of anyone other than the beneficiary or their spouse…usually by parents or other family members of individuals with developmental or other disabilities, or diagnosis of mental illness. They are much easier to set up and do not have the extensive requirements and limitations of a first party special needs trust. The most important difference is that there is no need for a "payback" clause. A third party special needs trust is a powerful planning tool for the family of an individual with a disability who is, or who may be in the future, receiving Medi-Cal or SSI. Unfortunately, we frequently see clients, usually on SSI, who must establish a first party special needs trust because they are receiving an inheritance. This invariably could have been avoided if the person who left the inheritance had established a third party special needs trust for the share of their estate intended for the individual with a disability.

Q: Are there alternatives to Special Needs Trusts?

A: Yes. Whether or not they make sense depends on the facts of each case. Good special needs planning always begins, however, with analyzing the nature of the public benefit program, and whether assets are even counted in eligibility determinations. For example, Social Security Disability Income (SSDI) does not count assets for eligibility determinations, while Supplemental Security Income (SSI) does. If the receipt of assets is a problem under the beneficiary’s program, often the purchase of “exempt” assets not counted under the program rules is a cost-effective alternative. We try and help our clients avoid special needs trusts if possible, and make the best choices on types and terms if not.

Q: If someone is on public benefits, and getting an inheritance, will they need a “First Party Special Needs Trust?”

A: Maybe. Again, we always begin with assuring that the benefit is “means tested;” a program that counts assets for eligibility determination. Not all do. We can help you determine whether or not there even is a problem posed by the inheritance. If the beneficiary is on means-tested benefits such as SSI or traditional Medi-Cal, a “First Party” special needs trust or pooled special needs trust may be needed. However, sometimes in inheritance scenarios we can avoid a first party self-settled trust with its onerous “payback” clause by asking the court to reform the deceased family member's estate plan to include a third party special needs trust with benefit-preserving language. Each case depends on its own facts, and we cannot always accomplish this. Still, we’d be happy to look at your situation and advise you if this might be a possibility in your case. Better still....we urge those with family members who have disabilities to plan ahead instead and avoid such dilemmas. Educate family members, such as grandparents who may be leaving bequests, to seek the counsel of an elder law attorney regarding third party special needs trust language. We enjoy coordinating all concerned family members’ estate planning in special needs situations.

Q: We have three children; two sons and a daughter. Our daughter is developmentally disabled and receiving SSI and Medi-Cal. Do we need a special needs trust?

A: Probably. Without a special needs trust, assets left to an individual receiving SSI or Medi-Cal will likely cause them to forfeit their program eligibility. In some cases, if an inheritance or gift is large enough to more than compensate for a lifetime of benefits, the loss of the Medi-Cal or SSI may not matter. In most cases however, the receipt of "countable resources" over allowable asset limits will simply cause a few years of ineligibility until the gifted or inherited funds are exhausted. We know this is not what you would want to happen to your estate. Some parents would try and deal with this situation by, for example, disinheriting their daughter with a disability and leaving everything to their sons with an "understanding" that they would use the funds to supplement their sister's care. This has many inherent risks, some not obvious, you need not take with your children's future. You should consider instead incorporating a "third party" special needs trust into your family's estate plan. We would be pleased to discuss this with you.

Q: Are special needs trusts available to the elderly also?

A: “Third Party” special needs trust are available for those over 65. The “self-settled” first party special needs trust discussed above are not available to those over age 65 unless established and funded before they were 65. The first-party “Pooled Trust” options are, however, available, with some caveats concerning funding.

Q: We have a family trust, but are not sure if we have the correct third party special needs trust language in it. What should we do?

A: If your estate plan was drafted by an experienced elder law attorney, you should be fine. Elder law attorneys are familiar with both estate planning as well as SSI and Medi-Cal regulations. We stress the use of experienced counsel, as we frequently review existing "special needs trusts" that either confused the type of benefit program the beneficiary was on, or that are drafted with inappropriate and disqualifying language. Nearly any attorney can insert a "special needs" provision from a forms book into a family living trust. One must understand, however, whether a special needs trust is even called for, and if it is, the type of special needs trust needed, as well as the required terms and appropriate language for the specific programs the beneficiary is on. At San Diego Specials Needs Law Center, we would be pleased to consult with you concerning your family's estate plan, and assess whether or not a special needs trust is appropriate. We also review existing estate plans and special needs trust to assure they are properly structured and most advantageous for the beneficiary and their family.