Mentally Capable Persons with Disabilities Can Now Establish Their Own Special Needs Trusts

May 13, 2020

A sudden influx of money, whether from an inheritance, a court settlement, or an unexpected gift from a grandparent, is usually pure good news.  However, for people with disabilities, that influx can lead to a major problem: the loss of vital government benefits.

Some government benefits are “means-based,” so those with disabilities are only eligible for them if their means (income and assets) are below a certain level.  Means-based benefits include Medicaid (called Medi-Cal in California), Supplemental Security Income (SSI), In-Home Supportive Services, Section 8 housing, and certain veterans’ benefits.

In order to receive those public benefits, you must report your income and assets to the government to show that you qualify, and thereafter you must report any changes that put you above the qualifying limit.  For example, in California, single adults with disabilities must show that they have no more than $2,000 in non-exempt assets before being able to receive Medi-Cal.  That $2,000 limit also applies to other benefits, such as SSI and In-Home Supportive Services.  If you receive money (even a small amount) that pushes you over that $2,000 asset limit, the government can halt those benefits.  This can be especially devastating for those who depend on Medi-Cal coverage for long-term nursing care (which Medicare does not cover).

To avoid losing your public benefits due to excessive assets, you must (1) quickly spend down your assets by paying for certain allowable items, and/or (2) put the money into a Special Needs Trust.  A spend-down, transfer into a Special Needs Trust, or both can bring your assets down to $2,000 in a way that is acceptable to the government, so you will continue to receive your benefits.  Otherwise, your benefits will be suspended until your money is depleted, and then you will have to re-apply for your public benefits.

The problem with a “spend-down” is that when you receive a large sum of money, it may not be possible to quickly and correctly spend it in time to avoid losing your public benefits.  And the problem with setting up a Special Needs Trust, until recently, is that you had to get somebody else to do it for you, even when it would be funded with your own money.

First-Party Individual Special Needs Trusts: If you are younger than 65 and have disabilities, you can put your money into a first-party individual Special Needs Trust, also called a self-settled Special Needs Trust.  [See 42 U.S.C. § 1396p(d)(4)(A).] (For those with disabilities who are over 65, and those whose trust funds come from other people, there are “pooled” and “third-party” Special Needs Trusts, which are outside the scope of this article.)

“First-party” means you are funding your trust with your own money.  These trusts are needed when you are receiving public benefits and you come into some money from, for example, an inheritance or the settlement of a personal-injury lawsuit.  Generally, when there is a large inheritance or a settlement, an attorney holds the money in a special account while you plan how to receive it in a way that lets you avoid losing your public benefits.

Until December 2016, for a mentally-competent adult with a disability, establishing a first-party individual Special Needs Trust represented a loss of independence, because the law required you to have your parent or grandparent (if you had one) establish a Special Needs Trust before you could move funds into it.  Those with no living parent or grandparent had to engage in a convoluted and costly court process.

This was demeaning for those who were capable of managing their own affairs, and it could be costly if court involvement was required.  If the court established a Special Needs Trust for your funds but required ongoing court supervision, your funds could end up paying for attorneys, bond premiums, filing fees, and expensive court accountings over the years, instead of paying for your special needs.

However, the Special Needs Trust Fairness Act, signed by President Obama on December 13, 2016, changed that.  Under the Special Needs Trust Fairness Act, individuals with disabilities who are under age 65 and are mentally capable of establishing a trust can independently establish their own Special Needs Trust.  The Special Needs Trust Fairness Act corrected a decades-old error in federal law which only allowed a parent, grandparent, legal guardian, or the court to establish a Special Needs Trust even when it would be funded with the disabled individual’s own assets.

This change in the law improved the autonomy of adults with disabilities, saved them time, trouble, and money, and made Special Needs Trusts a more efficient and effective way for people to keep their public benefits after receiving an inheritance, a settlement of a personal-injury claim, or an unexpected influx of money from some other source.

This change in federal law did not affect persons with disabilities who lack the mental capacity to establish a trust.  For those persons, a Special Needs Trust can be established through California Probate Code sections 3600 – 3613 (if funding a trust using litigation proceeds) or through California Probate Code section 2580 (if the person is under a conservatorship).

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This article is based on the law as of the date posted at the top of the article. This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.