Special Needs Trust Spending: A Guide for California Families
At Desert Law Group, we understand the care and concern families feel when planning for the future of a loved one with disabilities.
A Special Needs Trust (“SNT”) offers a thoughtful way to provide for them without risking their access to essential government benefits.
In this article, we’ll explore how these trusts work and provide guidance on appropriate and beneficial ways to use SNT funds in California.
What Is a Special Needs Trust?
A Special Needs Trust (SNT) is designed to support individuals with disabilities by managing resources in a way that doesn’t interfere with their eligibility for government programs like Supplemental Security Income (SSI) or Medi-Cal.
These trusts are created to hold assets for the benefit of the individual while maintaining compliance with strict rules.
Here’s a quick breakdown:
- Assets: Held in the trust and managed by a trustee.
- Trustee’s Role: Oversees distributions to ensure they align with the trust’s terms and preserve government benefit eligibility.
- Purpose: To supplement—not replace—public benefits like SSI or Medi-Cal.
- Beneficiary: The person with disabilities does not control the assets directly, which helps protect their eligibility for assistance.
There are two main types of SNTs:
- First-Party Trusts: Funded with the beneficiary’s own money, such as an inheritance or lawsuit settlement. These trusts often include a “payback” provision requiring any remaining funds to reimburse Medi-Cal after the beneficiary passes away.
- Third-Party Trusts: Established and funded by someone else, like a parent or grandparent. These don’t include a payback requirement and can pass to other heirs when the beneficiary dies.
Choosing between the two depends on factors like the source of funds and the age of the beneficiary.
Permissible Expenses
A Special Needs Trust is designed to enrich the beneficiary’s quality of life by covering expenses that government benefits do not. Here are some examples of what the trust can fund:
Medical and Therapy Costs
Medical treatments, therapies, and equipment not covered by insurance can be paid for through the trust.
Example: Physical therapy sessions, hearing aids, or modifications to a vehicle for accessibility.
Education and Skill Development
Educational programs, tutoring, or job training expenses can be handled through the trust.
Example: Tuition for trade school, specialized life skills programs, or private tutoring.
Personal Assistance
The trust can pay for in-home care, personal assistants, or companion services to support daily living.
Example: Hiring someone to help with household tasks or provide social interaction.
Transportation Needs
Vehicle purchases or modifications and maintenance, as well as specialized transport services, can be funded.
Example: Buying a wheelchair-accessible van or covering rides to medical appointments.
Home Accessibility Modifications
Adapting a home to be more accessible is a common and allowable expense.
Example: Installing ramps, widening doorways, or adding safety rails in bathrooms.
Recreational Activities
Funds can be used for hobbies, entertainment, or vacations that promote the beneficiary’s enjoyment and engagement.
Example: Paying for art classes, tickets to events, or family trips.
Other Costs
Legal and financial services, insurance premiums, and adaptive technology are all valid uses for trust funds.
Non-Permissible Expenses
While the trust can fund many helpful resources, some expenses are restricted to ensure compliance with government benefit rules.
Basic Living Costs
Expenses like food, rent, utilities, or property taxes are generally considered the responsibility of government programs and should not be paid directly from the trust.
Why? Covering these costs from the trust can reduce the beneficiary’s SSI payments.
Direct Cash Payments
Cash given to the beneficiary is treated as income and could jeopardize their eligibility for benefits.
Why? SSI benefits may be reduced or eliminated if cash distributions are made.
Gift Cards
Gift cards are viewed as equivalent to cash and are not allowed under the rules for SNTs.
Trustees should ensure payments go directly to vendors or service providers to avoid issues with compliance.
Key Principles of SNT Spending
To make the most of a Special Needs Trust, it’s essential to follow spending guidelines that protect the beneficiary’s access to government benefits while meeting their unique needs.
Here are some important principles to keep in mind:
Enhance, Don’t Replace Government Benefits
The trust’s purpose is to provide for the beneficiary in ways that government programs cannot. Funds should be used to improve their quality of life, not to pay for expenses already covered by programs like SSI or Medi-Cal.
No Cash Payments
Giving cash directly to the beneficiary is not allowed, as it could be counted as income and reduce or eliminate their SSI benefits.
Instead, trustees can consider alternatives, such as pre-paid debit cards (like True Link cards) that limit spending to approved categories or make payments directly to vendors or service providers.
Careful with Food and Housing
Expenses like food and rent require caution. These costs are usually considered “in-kind support” and may reduce SSI payments. However, using an ABLE account to cover such expenses can help avoid penalties while still providing necessary support.
Discretionary Spending
The trustee has a significant responsibility to assess what’s in the best interest of the beneficiary and make thoughtful decisions about spending. Flexibility and careful judgment are essential to ensure the funds meet the beneficiary’s current and future needs.
Avoid Overly Rigid Rules
While it’s important for the trust document to provide clear guidance, terms that are too restrictive can create challenges. A well-drafted trust should allow the trustee some flexibility to address the beneficiary’s changing circumstances over time.
Direct Payments to Vendors
Whenever possible, payments should be made directly to service providers or vendors rather than giving money to the beneficiary. This approach helps maintain compliance with benefit eligibility rules and reduces the risk of errors.
Plan for the Future
The beneficiary’s needs may evolve over time, so it’s important to keep long-term considerations in mind.
For example, a trust might initially focus on educational expenses but later shift to personal care or medical support as the beneficiary ages. The trustee should prioritize adaptability to ensure the trust remains effective.
By understanding and following these principles, families, and trustees can ensure that SNT funds are used effectively to support the beneficiary’s well-being while safeguarding their access to critical benefits.
Special Considerations
Managing a Special Needs Trust requires careful planning and an understanding of how specific rules and situations might apply. Here are some key points to keep in mind:
Third-Party vs. First-Party Trusts
Third-party trusts are created and funded by someone other than the beneficiary, like a parent or grandparent, and typically do not require Medi-Cal reimbursement after the beneficiary passes away.
In contrast, first-party trusts are funded with the beneficiary’s own assets (e.g., inheritance or legal settlements) and must include a “payback” provision to reimburse Medi-Cal for services provided during their lifetime.
Medi-Cal Payback
For first-party trusts, California law requires that any remaining funds after the beneficiary’s death be used to repay Medi-Cal for healthcare costs covered during their life.
This payback provision ensures the state is reimbursed before any remaining assets can be distributed elsewhere.
What Happens to a Special Needs Trust at Death in California?
- First-Party Trusts: After the beneficiary passes, Medi-Cal is reimbursed for expenses paid on their behalf. Any remaining funds, if any, may then go to other designated beneficiaries.
- Third-Party Trusts: These trusts don’t have a Medi-Cal payback requirement. Once the beneficiary passes, the remaining assets can go to family members, charities, or other individuals specified in the trust document.
Balancing Private Spending and Public Benefits
The trustee must carefully evaluate how each expenditure will impact the beneficiary’s public assistance. Spending that enhances the beneficiary’s life without reducing or eliminating their benefits is ideal.
This balance requires regular review of both the beneficiary’s needs and government benefit requirements.
The Role of the Trustee
Selecting the right trustee is crucial. A trustee must have a good understanding of SNT rules, government benefit programs, and the unique needs of the beneficiary.
Professional trustee services can often help families avoid costly mistakes while ensuring the beneficiary’s well-being. Long-term planning is equally important, as the trustee must think ahead to ensure funds are used wisely over time.
Is There an Age Limit for a Special Needs Trust in California?
There’s no age limit for benefiting from an SNT, so it can support a person with disabilities throughout their lifetime.
However, certain types of first-party trusts, like payback trusts, must be established before the beneficiary turns 65. Knowing these rules ensures the trust is set up properly to meet the individual’s needs.
Planning for Your Loved One’s Future
Setting up a Special Needs Trust requires thoughtful planning and a clear understanding of the beneficiary’s current and future needs. At Desert Law Group, we have been helping families across California create comprehensive plans since 2001.
We’re here to help you protect your loved one’s well-being while preserving their access to crucial government benefits.
Ready to learn more? Call us today at 760-239-5661 or reach out via our online form to schedule a consultation. Together, we’ll create a plan that provides peace of mind for you and lasting security for your loved one.
