A California special needs trust (or supplemental needs trust) holds assets for the benefit of someone to improve the quality of her life without jeopardizing government benefits that are available to her.
In this post we will continue to discuss special needs trusts. Here we will focus on the different types of special needs trusts. This is the second post in a two-part series.
In the first post we discussed who needs a special needs trust and how to create a special needs trust.
Some Rules Apply Both to First-Person Special Needs Trusts and to Third-Person Special Needs Trusts
Generally there are 2 ways to create and transfer assets into a special needs trust. Depending on how that happens, the trust will be:
- A first-person special needs trust; or
- A third-person special needs trust.
One way is the person who anticipates receiving government benefits transfers her assets into the special needs trust. This is called a “first-person” (or first-party) special needs trust.
The other way is that someone other than the person who anticipates receiving government benefits transfers his assets into the special needs trust for the benefit of that other person. This is called a “third-person” (or third-party) special needs trust.
For both types of special needs trust the person receiving or anticipating receiving government benefits can’t be the trustee in charge of carrying out the terms of the special needs trust.
All special needs trusts must be irrevocable. A trust that is irrevocable generally isn’t changeable.
If you receive or anticipate receiving government benefits, then you need to be careful about how you create and transfer assets into a special needs trust.
First-Person Special Needs Trusts
Some government benefits have “lookback” and disqualification rules. Those rules could disqualify you from receiving government benefits if you give away your assets. Transferring assets to an irrevocable trust often is considering giving those assets away.
As discussed above, a special needs trust must be irrevocable. Accordingly, transferring your assets to a special needs trust may cause you to be ineligible to receive government benefits that are based on financial need.
Restrictions apply to first-person special needs trusts. A first-person special needs trust needs to contain language requiring that after your death the trustee must reimburse the state for any reimbursable government benefits that you received. The intended beneficiaries of the first-person special needs trust won’t necessarily receive any inheritance from the trust after your death. They wouldn’t receive anything until the trustee has completely reimbursed the government for any reimbursable government benefits that you received.
Third-Person Special Needs Trusts
Again, a third-person special needs trust contains assets of someone other than the person who receives government benefits. There are 2 types of third-person special needs trusts.
Neither type of third-person special needs trust needs to contain the government reimbursement language required in first-person special needs trusts.
The 2 types of third-person special needs trusts are:
- Stand-alone third-person special needs trusts; and
- Nested third-person special needs trusts.
(We created these names for these types of third-person special needs trusts. Other people may call them something else.)
Stand-Alone Third-Person Special Needs Trusts
A person creates and funds a stand-alone third-person special needs trust just like most routine trusts. He signs a trust document and assets transfer to the trust.
The difference is that a stand-alone third-person special needs trust can’t hold assets of the person who receives government benefits.
A benefit of having a stand-alone third-person special needs trust is that it can hold the assets of anyone who wants to put assets into it (other than the person who receives government benefits). People can make direct lifetime gifts to a stand-alone third-person special needs trust. Also someone could draft his will or trust to provide a gift at his death to the stand-alone third-person special needs trust.
The gift would improve the quality of life of the person who receives government benefits without jeopardizing those government benefits.
Nested Third-Person Special Needs Trusts
Often nobody in the life of the person receiving government benefits can afford to make a gift to a special needs trust during their lifetime. Then there is no real benefit to having a stand-alone third-person special needs trust.
In that case, if the person receiving government benefits likely would inherit after the death of someone, then that person should consider creating a nested third-person special needs trust. This situation often arises with the parents of a child (adult or not) who receives government benefits.
Without carrying out some estate planning, the parents could inadvertently cause their child to lose the government benefits. The child would lose her government benefits when the second parent dies and the child inherits assets outright. A nested third-person special needs trust avoids this outcome.
A nested third-person special needs trust is simpler than it may sound. The parents simply create a trust or a will that contains the nested third-person special needs trust. The will or trust needs to provide that any inheritance of the person receiving government benefits does not go to that person outright.
Rather, the inheritance stays in a nested third-person special needs trust. Its terms are contained within the will or trust of the parents. The nested third-person special needs trust springs out of the parents’ trust or will.
Then the person receiving government benefits never receives her inheritance outright. Accordingly, she does not lose her government benefits. Still the inheritance can improve the quality of her life.
Get Help from an Experienced Special Needs Trust Attorney
Making a mistake creating and funding a special needs trust can be catastrophic. It could cause someone to lose government benefits that she relies on for important basic needs: medical care, housing, etc.
Hiring an attorney with experience with special needs trusts can help avoid this. In addition, the advice and guidance of an attorney experienced with special needs trusts is invaluable for attaining your goals in creating and carrying out the terms of special needs trusts.
At Meinzer Law Firm, P.C., we have over 20 years of experience helping clients achieve their goals regarding special needs trusts. Contact Meinzer Law Firm, P.C., in Torrance to assist you with a special needs trust.
