How Do Special Needs Trusts Work? When set up correctly, a special needs trust provides financial support for your disabled child. They don’t have to sacrifice much-needed benefits. Here’s how.
You’ve always been your child’s biggest advocate. But you worry what will happen when you’re no longer around to support them. Who will ensure they have what they need and have access to care?
I’m here to tell you that you don’t have to have incredible financial resources to make sure your child gets this care. If you play by “special needs trusts rules”, they can get government benefits and have the financial security that Special needs trusts in California provide at the same time.
What Is a Special Needs Trust?
To answer this question of how does a special needs trust work, we must first answer: what is a special needs trust? A special needs trust is a legal entity specifically designed to financially provide for a disabled child or adult.
The beneficiary of the trust is your child. The trustee is the person who manages the assets in the trust on your child’s behalf. This will usually be you until you’re gone.
Maintaing as much independence as possible for your child is important, so learn more about how ABLE accounts help special needs adults live independently while preserving benefits.
How Do Special Needs Trusts Work to Preserve Benefits?
As a special needs adult, your child can receive Supplement Security Income, needs-based Social Security, but only if they have fewer than $2000 in assets in 2022.
That’s nothing for a child who may be unable to make a living on their own.
They also need to qualify for Medi-Cal (California Medicaid) to always have access to medical care. But they’d lose that too if they had too many assets.
Specials needs trusts rules allow a third party to put a whole lot more than $2000 into the trust without threatening benefits. The person setting up or funding the trust could be anyone who wants to provide for this child. It could be grandma, uncle, auntie, mom, dad.
Anyone that is except the child themselves because we want to preserve your child’s benefits. First-party special needs trusts in California are a no-go for another reason.
What Happens to Trust Assets When the Trust Is No Longer Needed?
Let’s say your special needs child has siblings or you have nieces and nephews. You’d probably want them to get any money left over in the trust when your disabled adult child no longer needs it.
If it’s a third-party trust, you can state that anything remaining goes to them after the disabled child passes on. However, if this were a first-person trust, funded by your child, then Medi-Cal would be able to recoup any money they paid out. Then the trust’s beneficiaries get anything that’s left — probably not much.
Money-Saving Tip: If the child has a first-party trust and a third-party, they should deplete the first-party trust before using the third-party funds for this reason.
Seemingly small decisions like this can make a big difference in how much your child has available for their care and how much of that hard-earned money stays in the family. So I’m here when you’re ready to talk about estate planning.
How Do I Fund the Special Needs Trust?
You can set up a trust with no resources in it. But for it to work as a trust, someone needs to fund it. You can place bank accounts, brokerage funds, properties, etc., into that trust. The trustee can then move around and draw on these resources to provide for the child for their lifetime.
Do I Need a Successor Trustee?
Who will manage the trust when you become deceased or incapacitated? This is never an easy decision. Your first thought might be to make your special needs child’s typical sibling the trustee because they already care for their brother or sister. While this makes some sense, for the sake of the relationship, I usually recommend against it.
Sibling or Family Member
A typical sibling managing the money of the special needs sibling can create a power dynamic that brings on resentment in the relationship — both ways.
If you opt for family, a trusted niece or nephew is usually a better idea.
Bank or Individual Fiduciary
Banks, trust companies, and private professional fiduciaries regularly manage special needs trusts. I know this sounds really impersonal. But these big banks and companies have care managers. These are dedicated and caring people who choose to do this for a living and are experts at balancing financial support now with making the trust last as long as it needs to last.
Suppose you have concerns about a bank trustee, set the typical sibling up as a trust protector. As a trust protector, the sibling gets annual accountings of how the trustee manages the assets. The sibling can threaten or replace the trustee if they don’t do a good job.
This takes a lot of weight off the sibling, who can continue just to be the loving sibling most of the time and step in as protector only if needed.
How Do Special Needs Trusts Work? Next Steps
You and I will have a Zoom call that takes one to one and a half hours. During this time, I’ll answer your questions about how do special needs trusts work? I’ll learn about you, your child, your needs, your concerns, and your goals, so I can tailor the trust to your unique situation.
We can review everything together before signing online, so you understand how everything works. I’ve only scratched the surface here. But you can now enter a trust conversation confidently. You now know how special needs trusts work in California.
If you’d like to learn more about special needs trusts, I’ve created a more in-depth webinar just for you. And if you’re ready to secure your child’s financial future with a trust, let’s start the conversation with a free intake call.