In my estate planning practice, I often have clients who wish to make gifts or bequests to children or other family members who are receiving public benefits without interfering with those benefits. This may be possible through the use of what is known as a Special Needs Trust. A Special Needs Trust allows funds to be set aside, in trust, for beneficiaries who are on public benefits without causing the beneficiary to lose his or her eligibility for those benefits. The funds held in the Special Needs Trust can then be used to supplement the beneficiary’s public benefits to provide a quality of life for the beneficiary that he or she would not otherwise enjoy.

When to Consider a Special Needs Trust 

Are the Public Benefits Needs-based?  Not all individuals receiving public benefits will lose eligibility for those benefits due to a gift or bequest – it all depends upon what type of public benefits the person is receiving. The key determination is whether the public benefits the individual is receiving are “needs-based.” Needs-based benefits are those public benefits that require that the recipient earn below a certain income and/or have less than a certain amount of assets in order to qualify for the benefits. Needs-based benefit programs include SSI, Medi-Cal (known as Medicaid outside of California), IHSS and others. All of those benefit programs have asset and income ceilings that a recipient must not exceed in order to qualify for the benefit. In contrast, social security and Medicare do not have maximum asset and income levels and therefore they are not considered needs-based programs.

Why the Type of Benefits Matter. If an individual is receiving needs-based public benefits, then even a small gift or bequest to that individual could cause him or her to lose those benefits. Such a loss in public benefits could be devastating. For example, if the individual receives Medi-Cal benefits, either directly or as part of his or her SSI benefits, the loss of those benefits may leave the individual with inadequate health care coverage – or none at all. Thus, while a gift or bequest will not affect eligibility for those individuals who receive public benefits that are not needs-based, special care must be taken when considering a gift or bequest to an individual who is receiving needs-based benefits.

How a Special Needs Trust Can Help

Whereas a gift or bequest made directly to an individual receiving needs-based public benefits may trigger the loss of those benefits, no loss in benefits will occur if the person making the gift or bequest does so by means of a properly established Special Needs Trust. Here’s how it works:  A third party properly establishes a Special Needs Trust for the benefit of the recipient of the needs-based public benefits. The Special Needs Trust can be established and funded during the third party’s lifetime or the third party can direct, as part of his or her own estate plan, that the Special Needs Trust be established and funded upon his or her death. Once the Special Needs Trust has been funded, the funds in the Special Needs Trust are used to pay for goods and services for the beneficiary that are not covered by public benefits. The key is that the Special Needs Trust does not replace public benefits, but supplements the public benefits, which the beneficiary continues to receive, by providing a source of funds to pay for those goods and services not provided through public benefits.

What Kind of Goods and Services Can A Special Needs Trust Pay For? 

Consider the following example of how a family may use a Special Needs Trust: A husband and wife have a child who receives monthly SSI payments and is also on Medi-Cal. If the husband and wife leave a bequest to the child outright, the child will lose eligibility for those public benefits unless the bequest is very small. In contrast, if the husband and wife leave the bequest to a Special Needs Trust established for the benefit of the child, there is no limitation as to the size of the bequest and the trust funds can be used on behalf of the child to provide the child with a quality of life he or she would otherwise not enjoy, without interfering with the child’s continued eligibility for public benefits. For example, the funds in the Special Needs Trust could be used for the child’s education or for recreation – perhaps the child would benefit from a computer, or a television, a DVD player, books, music, and other goods and services that the child could likely not afford to purchase using his or her SSI stipend.  Or perhaps the child would benefit from a trip to Hawaii or other travel. If the child is wheelchair-bound, the Special Needs Trust can purchase a special van for transport. If the child is not receiving housing as part of his or her SSI payment, the Special Needs Trust can purchase a home for the child. These are just a few examples. So long as the funds in the Special Needs Trust are not spent on goods or services already covered by the public benefits the child is receiving, the funds can be used for almost any purpose benefitting the child without affecting the child’s public benefits eligibility – with one important caveat: the funds cannot be given directly to the child but instead must be paid by the trustee of the Special Needs Trust directly to the third party provider of the goods and services. Any payment of funds from the Special Needs Trust directly to the child could cause the child to lose eligibility for his or her benefits.

Because Special Needs Trusts are highly technical in nature – and the administration of such a trust must be handled correctly to avoid an inadvertent loss of benefits to the beneficiary – it is important that you work with a competent attorney qualified to advise you on this type of trust.

In future posts, I will discuss other important considerations regarding Special Needs Trusts, including tips on how and whom to choose as the trustee. For now, though, just be aware that if you are considering a gift or bequest to an individual on needs-based public benefits, you can, through the use of a Special Needs Trust, provide a quality of life for the individual without the danger of impacting the individual’s public benefits.