Families with a child, sibling, parent, or grandchild who has a disability face an estate-planning question no other family confronts. A standard inheritance—paid outright—will almost always disqualify the beneficiary from Supplemental Security Income, Medi-Cal, In-Home Supportive Services, and the rest of the means-tested public benefits that may be supporting them. A properly drafted special needs trust solves the problem by holding the inherited assets in a structure that supplements public benefits rather than replacing them.
For more than four decades, our firm has drafted and administered special needs trusts for California families. The work is technical, the rules change, and the stakes are uniquely personal. We approach each engagement with the recognition that the document we are drafting will outlast every member of the immediate family and govern the most vulnerable life in it.
Third-party special needs trusts
The most common form of special needs planning is a third-party trust funded with assets that have never belonged to the beneficiary—typically the parents' assets, structured to flow through the trust at the parents' deaths. These trusts have no Medi-Cal payback obligation at the beneficiary's death, leaving the family free to designate remainder beneficiaries—siblings, nieces and nephews, charities—as they choose.
We typically design third-party SNTs as subtrusts of the parents' revocable trust. At the surviving parent's death, the share of the estate intended for the beneficiary with special needs is funded into the SNT subtrust rather than distributed outright. The subtrust then operates indefinitely under terms designed to supplement, not replace, the public benefits the beneficiary may be receiving.
First-party (self-settled) special needs trusts
First-party trusts—sometimes called (d)(4)(A) trusts—hold assets that already belong to the beneficiary. Common funding sources include personal-injury settlements, retroactive Social Security awards, and unexpected inheritances received outright before proper planning was in place. Federal law permits these assets to be placed into a first-party trust without disqualifying the beneficiary, but only if the trust meets strict statutory requirements: it must be established by a parent, grandparent, legal guardian, the court, or the beneficiary; the beneficiary must be under 65 at the time of funding; and the trust must require that, at the beneficiary's death, the state Medicaid agency be reimbursed for benefits provided during the beneficiary's lifetime up to the amount remaining.
First-party trusts also include pooled trusts under §(d)(4)(C), which can be appropriate where the funding amount is modest, where the beneficiary is over 65, or where the family does not have an appropriate trustee available. We advise on which structure fits the situation and coordinate with pooled-trust administrators when that path is the right one.
What the trustee can—and cannot—pay for
The administration of a special needs trust is at least as important as its drafting. Distributions from the trust must supplement the beneficiary's needs without providing food and shelter in a way that reduces SSI under the in-kind support and maintenance rules. Acceptable distributions include uncovered medical care, dental and vision care, personal-care attendants beyond what IHSS provides, recreation and travel, education, a vehicle, electronics, clothing, and a great many quality-of-life expenses. Cash distributions to the beneficiary, by contrast, are nearly always disqualifying.
We routinely counsel trustees—both family members and professionals—on the day-to-day administration. Most adverse benefit determinations we see arise not from the trust's terms but from a single inadvertent distribution. Education up front prevents almost all of them.
Coordination with the rest of the plan
A special needs trust does not exist in isolation. It is coordinated with the parents' revocable trusts, with retirement account beneficiary designations, with life insurance, with 529 ABLE accounts, and with any conservatorship or limited conservatorship the beneficiary may have. We integrate the SNT into the broader family plan so that nothing inadvertently flows outright to the beneficiary at the wrong time and so that the trust is funded promptly when the time comes.
Long-term administration and trustee succession
The most overlooked aspect of SNT planning is the trustee succession plan. The first trustee—often a parent or sibling— will eventually need to be replaced, and the document must name a credible successor or a mechanism for appointing one. We routinely include provisions naming professional fiduciaries as successor trustees, requiring trust-protector oversight, and permitting the beneficiary's care team to participate in decisions where appropriate.
A Coachella Valley couple in their seventies engaged the firm to refresh their estate plan after the diagnosis of an adult child with a developmental disability. We restructured their revocable trust to include a third-party SNT subtrust for the adult child, redirected the retirement-account beneficiary designations through a properly drafted see-through trust, coordinated a small life insurance policy to provide additional liquidity at the second death, and named both a sibling and a professional fiduciary in succession to administer the SNT for the beneficiary's lifetime.
If your family includes a beneficiary with special needs—at any age and at any benefit level—we welcome the opportunity to design or refresh the plan that will support them.