What happens when a person receiving SSI or Medi-Cal suddenly receives an inheritance, lawsuit settlement, or other substantial sum of money?
Without planning, that money can create a serious problem. Many public benefits are “means-tested,” meaning eligibility depends in part on how much income or assets a person has.
A first-party special needs trust can sometimes solve that problem.
It allows a person with a disability to place his or her own assets into a specially designed trust so the money can be used for that person’s benefit without automatically disqualifying the person from SSI, Medi-Cal, or other means-tested benefits.
Whose Money Goes Into the Trust?
This is what makes a first-party special needs trust different from other special needs trusts.
A first-party trust is funded with money that already belongs to the person with the disability.
Common examples include:
- A personal injury or medical malpractice settlement
- An inheritance that was left directly to the beneficiary
- A divorce or property settlement
- Savings or other assets already owned by the beneficiary
If the money instead comes from a parent, grandparent, or another third party as part of their estate plan, a third-party special needs trust may be the better option.
How Does It Work?
Once the trust is created and properly funded, the beneficiary no longer has unrestricted access to the money.
Instead, a trustee manages the funds and makes distributions for the beneficiary’s benefit.
Trust funds may be used for things such as:
- Medical and dental expenses not covered by insurance
- Therapy and personal care
- Education and training
- Transportation
- Computers, phones, and other technology
- Recreation and travel
- Household items and personal expenses
- Other goods and services that improve the beneficiary’s quality of life
The goal is not simply to preserve government benefits. It is to allow the trust assets and public benefits to work together.
Can the Beneficiary Just Take Money Out?
Usually, no.
Cash paid directly to the beneficiary can reduce SSI, and payments for certain expenses can also affect benefits.
That is why the trustee’s role is so important.
A knowledgeable trustee should understand not only the terms of the trust, but also how different types of distributions may affect SSI and Medi-Cal eligibility.
A perfectly drafted trust can still cause problems if it is administered incorrectly.
Who Can Create a First-Party Special Needs Trust?
The most common type is sometimes called a (d)(4)(A) special needs trust, referring to the federal law that authorizes it.
Generally, the beneficiary must be disabled and under age 65 when the trust is established and funded.
Depending on the circumstances, the trust may be established by the beneficiary, a parent, grandparent, guardian, or court.
Another option in some cases is a pooled special needs trust, which is administered by a nonprofit organization.
What Is the Catch?
There is one very important difference between a first-party special needs trust and a third-party special needs trust.
A first-party trust generally must include a Medicaid/Medi-Cal reimbursement provision.
When the beneficiary dies, the state may be entitled to reimbursement from the remaining trust assets for certain Medi-Cal benefits paid on the beneficiary’s behalf.
If funds remain after required reimbursement and other permitted expenses, the balance can generally pass to the people named as remainder beneficiaries.
That payback requirement exists because the trust is holding money that originally belonged to the beneficiary.
First-Party vs. Third-Party Special Needs Trusts
The easiest way to remember the difference is:
First-party trust: The beneficiary’s own money goes into the trust.
Third-party trust: Someone else’s money goes into the trust for the beneficiary.
That difference matters.
A properly drafted third-party special needs trust generally does not have the same Medi-Cal payback requirement because the assets never belonged to the beneficiary.
For families planning ahead, this is one reason it is usually better to leave an inheritance for a beneficiary with special needs directly to a properly drafted third-party trust rather than leaving the inheritance outright and trying to fix the problem later.
Timing Matters
Special needs planning is often easiest before the money is distributed.
If a person with a disability is about to receive a settlement or inheritance, it is worth reviewing the options before funds are placed directly into the beneficiary’s name.
Once the money is received, planning may still be possible, but there may be additional steps and complications.
The Bottom Line
A first-party special needs trust can be an extremely useful tool when a person with a disability receives money that could otherwise interfere with public benefits.
The trust allows those funds to be managed for the beneficiary’s benefit while helping preserve eligibility for programs such as SSI and Medi-Cal.
But the rules are technical, and both the drafting and administration of the trust matter.
If a settlement, inheritance, or other significant payment is expected, getting advice before the funds are distributed can make a substantial difference.
Do You Need Help With a Special Needs Trust?
If you or a family member is expecting an inheritance, settlement, or other significant payment, it is important to address special needs planning before the funds are distributed.
The Law Office of Maureen Lyons, PC can help you determine whether a first-party special needs trust is appropriate and how it should be structured to protect eligibility for available public benefits.
Contact our office to schedule a consultation.
This article is intended for general informational purposes only and is not legal advice. Special needs trust and public-benefit rules are complex and may change. Individual circumstances should be reviewed with an attorney familiar with special needs planning.