Planning for a loved one with special needs isn’t just about legal documents—it’s about creating a structure of protection, support, and sustainability that can last a lifetime. If you’ve been exploring the idea of a Special Needs Trust (SNT), you’ve likely learned about how these trusts can preserve eligibility for public benefits while providing additional resources and care.
But what happens after the trust is created? What do trustees and families need to know as the trust becomes active, is used throughout the beneficiary’s life, and eventually winds down?
In this post, we’ll walk through the entire life cycle of a Special Needs Trust in California—from the initial setup to final distribution—so you can understand not just how to create a trust, but how to manage and complete it with confidence.
Step 1: Creating the Special Needs Trust
The first stage of a Special Needs Trust is, of course, creating it. This should always be done with the help of a qualified attorney who specializes in special needs planning in your state—someone who understands how the trust will interact with local and federal public benefits programs like SSI, Medi-Cal, SSDI, and Medicare.
There are two main types of Special Needs Trusts:
- Third-Party SNTs are typically created by parents, grandparents, or other loved ones using their own assets for the benefit of someone with disabilities.
- First-Party SNTs are created using the disabled individual’s own money, such as proceeds from a lawsuit settlement or an inheritance received outright.
At the drafting stage, several important decisions must be made, including:
- Who will serve as the trustee and successor trustee(s)—these are the individuals or professionals responsible for managing the trust
- What happens to any remaining assets in the trust after the beneficiary passes away
- Whether to include special roles like a trust protector, who has the authority to oversee the trust and replace the trustee if necessary
- Specific permissions for the trustee, such as hiring a care manager, transferring funds to an ABLE account, or making discretionary purchases for the beneficiary’s benefit
Once the trust is signed and notarized, it becomes a legally valid document. However, in most cases, it will remain unfunded during the lifetime of the person who created it, because that person is usually providing for the beneficiary directly. The trust is designed to be activated and funded later, typically upon the death of the trust creator or through other planned transfers.
Step 2: (Optional) Early Funding of the Trust
While many Special Needs Trusts are funded after the grantor’s death, there are scenarios when early funding may be appropriate. For example:
- During a divorce settlement, a parent may choose to transfer funds into the SNT to ensure the child’s inheritance is protected from the other parent’s future plans.
- If a generous relative passes away, they may have left money to the trust directly.
In these cases, it’s crucial that the trust be a standalone SNT, not one embedded within a revocable living trust (known as a “testamentary trust”), since testamentary trusts don’t spring into action until the grantor dies.
Step 3: Funding the Trust After Death
Now let’s say the person who created the Special Needs Trust (usually a parent) has passed away. What happens next?
At this point, the successor trustee of the parent’s revocable living trust will begin the trust administration process. This includes several key steps: first, they’ll need to identify and value all of the assets in the trust. Then, they’ll notify beneficiaries and relevant government entities as required by law.
The next step is to obtain a Tax ID number (EIN) for the Special Needs Trust—they should not use the beneficiary’s Social Security Number. Once that’s secured, the trustee will open a dedicated bank account in the name of the SNT to hold the inherited funds.
From there, the successor trustee will transfer the inheritance designated for the disabled beneficiary into this new SNT account. The inheritance might include:
- Cash and investment accounts
- Real estate, which will require a new deed transferring the property from the parent’s trust into the SNT
- Retirement accounts, such as inherited IRAs, where the SNT has been named as a beneficiary
- Cash and investment accounts
Once these assets are moved into the trust, the Special Needs Trust is officially funded and ready to be managed by its named trustee.
Step 4: Managing the Trust During the Beneficiary’s Lifetime
The trustee’s role is crucial once the SNT is funded. They are now responsible for:
1. Protecting Public Benefits
The trustee must understand which public benefits the beneficiary receives (like SSI or Medi-Cal) and ensure the trust distributions don’t interfere with eligibility. This often includes consulting with an attorney or benefits specialist.
2. Creating a Spending Plan
Work with the beneficiary (if appropriate) and possibly a care manager to develop a realistic budget for day-to-day needs, based on the beneficiary’s lifestyle, support needs, and housing situation.
3. Doing Long-Term Financial Planning
The trustee should collaborate with a financial advisor to create a projection for how long the trust funds will last, and whether there’s room for discretionary or “fun” purchases like vacations, hobbies, or going to the movies.
4. Making Permissible Distributions
The trustee must follow guidelines about what the SNT can and can’t pay for. Disallowed expenses could jeopardize benefits, so it’s important to understand the “rules”. You can learn more about what a SNT can be used for in the video below.
5. Maintaining Records and Filing Taxes
Trustees must keep careful records, prepare annual accountings, and file a fiduciary income tax return (IRS Form 1041) each year. This documentation is critical for transparency, especially if there are multiple parties involved.
Step 5: Closing Out the Trust
Eventually, the trust will need to be closed when the beneficiary passes away or the trust is no longer needed. Here’s what the trustee must do next:
1. Notify Medi-Cal (if applicable)
If the trust is a first-party SNT, California’s Department of Health Care Services (DHCS) must be notified of the beneficiary’s death. DHCS has four months to submit a Medi-Cal reimbursement claim, which the trustee must then pay before distributing any remaining funds.
2. Settle Debts and Expenses
Before any assets are distributed, the trustee must settle outstanding obligations of the trust. This typically includes paying for funeral and burial expenses, resolving any unpaid caregiving or medical bills, and covering legal and accounting fees incurred during trust administration. The trustee is also responsible for working with an accountant to file a final fiduciary income tax return for the trust.
3. Prepare a Final Accounting
Once debts and expenses are resolved, the trustee must prepare a final accounting. This document provides a detailed snapshot of:
- The value of the trust assets as of the date of the beneficiary’s death
- Any income received or distributions made since that time
- A breakdown of the remaining assets available for distribution
In some cases, remainder beneficiaries may waive the requirement for a formal accounting, especially in close family situations. However, it’s a best practice for the trustee to prepare the accounting regardless, as it provides transparency and helps protect the trustee if questions arise later.
4. Determine Final Beneficiaries
Some SNTs give the beneficiary a Power of Appointment, allowing them to direct where any remaining funds go after their death. If this power has not been exercised, the trust document will include default remainder beneficiaries.
The trustee should review the trust carefully to determine:
- Whether a Power of Appointment exists and has been exercised
- Who the remainder beneficiaries are
It’s common to collect distribution receipts from the remainder beneficiaries, confirming they received their share.
5. Hold a Reserve
We often recommend keeping a small reserve in the trust for a year to cover any late-arriving bills or tax obligations. Once that window has passed, the reserve can be distributed to the remainder beneficiaries.
From Planning to Peace of Mind
From its creation to final closure, the life cycle of a Special Needs Trust involves careful planning, ongoing oversight, and thoughtful administration. While it may seem daunting, the right team—including your attorney, successor trustee, financial advisor, and support professionals—can ensure that your loved one is protected and your plan is carried out smoothly.
Whether you’re just starting to think about setting up a trust or you’re deep into the process of managing one, it’s helpful to understand what’s ahead. If you’re already in the midst of administering a trust, be sure to check out our YouTube channel for more resources.
Need help navigating any part of this process? We’d love to support you. Schedule a consultation with our team today!