A special needs trust (SNT) is designed to hold assets for the benefit of a person with disabilities without disqualifying them from means-tested government benefits like Supplemental Security Income (SSI) and Medi-Cal. When drafted correctly, an SNT allows families to provide for a disabled loved one's quality of life while preserving their eligibility for essential public benefits. When drafted incorrectly, the trust can do the opposite: cause the beneficiary to lose the very benefits the trust was designed to protect.
The Fundamental Rule: Supplement, Not Supplant
The cardinal rule of a special needs trust is that it must supplement government benefits, not supplant them. This means the trust should pay for things that government benefits do not cover, such as recreation, entertainment, personal care items, travel, electronics, education beyond what is publicly funded, and similar quality-of-life expenses. The trust should never pay for food or shelter directly to the beneficiary, as these payments are treated as "in-kind support and maintenance" by the Social Security Administration and can reduce SSI benefits.
Mistake 1: Giving the Beneficiary Direct Access to Trust Funds
If the beneficiary has the right to demand distributions from the trust or has any control over how trust funds are used, the entire trust balance is counted as an available resource for SSI and Medi-Cal purposes. This typically disqualifies the beneficiary from benefits immediately. The trustee, not the beneficiary, must have sole discretion over distributions. The beneficiary should have no right to compel a distribution for any reason.
Mistake 2: Using the Wrong Type of Trust
There are two primary types of special needs trusts, and using the wrong one can have devastating consequences. A first-party SNT (also called a self-settled or d(4)(A) trust) is funded with the beneficiary's own assets, such as an inheritance received outright, a personal injury settlement, or accumulated savings. A first-party SNT must include a Medi-Cal payback provision: when the beneficiary dies, any remaining funds must be used to reimburse Medi-Cal for benefits paid during the beneficiary's lifetime.
A third-party SNT is funded with someone else's assets, typically parents or grandparents. A third-party SNT does not require a Medi-Cal payback provision, and remaining funds can pass to other family members after the beneficiary's death. Using a first-party trust structure when a third-party trust is appropriate results in unnecessary Medi-Cal payback obligations that can consume the entire trust balance.
Mistake 3: Directing Trust Distributions for Food or Shelter
SSI treats payments for food or shelter differently from other types of support. If the trust pays the beneficiary's rent, mortgage, utilities, or grocery bills, SSI considers these payments "in-kind support and maintenance" and reduces the monthly SSI benefit. While a modest reduction may be acceptable in some situations, improper distributions can result in a dollar-for-dollar reduction up to the presumed maximum value, which is currently one-third of the federal benefit rate plus $20.
Skilled trustees understand how to navigate this rule. In some cases, paying for shelter from trust funds and accepting a modest SSI reduction is the right strategy if the housing provided is substantially better than what SSI alone could afford. The key is making an informed decision rather than accidentally triggering a reduction.
Mistake 4: Failing to Coordinate With ABLE Accounts
California's ABLE (Achieving a Better Life Experience) accounts allow individuals with disabilities to save up to $100,000 without affecting SSI eligibility and up to significantly higher amounts without affecting Medi-Cal eligibility. ABLE accounts can be used for qualified disability expenses including housing, education, transportation, and health care. A comprehensive special needs plan should coordinate the SNT with an ABLE account to maximize the beneficiary's financial resources and flexibility.
Mistake 5: Choosing the Wrong Trustee
The trustee of a special needs trust must understand the complex rules governing distributions and benefits eligibility. A well-meaning family member who distributes trust funds improperly can cost the beneficiary their benefits. Options include naming a professional fiduciary, a pooled trust organization, or a family member who works closely with a special needs attorney to ensure compliance. The right choice depends on the size of the trust, the complexity of the beneficiary's needs, and the availability of qualified family members.
This article is for informational purposes only and does not constitute legal advice. Every family's circumstances are unique. Contact MVP Law Group for a consultation to discuss your specific situation.