Self-Settled Special Needs Trust in California: New Federal Legislation Allows Establishment of Trust Without Court Order
- Keystone News
- 850 Petitions
- Attorney-Client Privilege
- Attorney's Fees
- Caretaker Issues
- Competency/Undue Influence
- Evidence / Procedure
- Fiduciary Misconduct/Removal
- Lis Pendens
- Marriage and Community/Separate Property
- No Contest Clauses
- Non-Probate Transfers
- Petition for Instructions
- Powers of Appointment
- Real Estate Disputes
- Spendthrift Clause
- Statute of Limitations
- Probate News
- Probate Services
- Who We Help
For most individuals, a financial windfall would not be a source of anxiety. But for those individuals receiving public benefits (and their family members), that same influx of money can be a cause for alarm due to the very real prospect that the windfall will interfere with their continued access to needs-based public assistance.
One way of preserving eligibility for needs-based public assistance after the receipt of an inheritance, gift, or settlement is the creation of a Special Needs Trust (“SNT”). Prior to 2017, federal law prohibited individuals who were physically disabled, but mentally competent (e.g., a mentally competent, but physically disabled plaintiff in a personal injury lawsuit who received settlement funds) from creating their own “self-settled” SNT. Instead, those individuals had to resort to asking a parent or a grandparent to establish a SNT for them. And if they had no parents or grandparents willing to do so, then the benefits recipient would be forced to hire an attorney to petition the courts to establish a SNT for their benefit, significantly escalating the time and expense for the disabled individual. Thankfully, in December 2016, Congress passed the Special Needs Trust Fairness Act (the “SNTFA”) to address this problem. The SNTFA amended federal law to permit mentally competent individuals to form their own “self-settled” special needs trusts without the need for a court order.
As background, individuals with serious disabilities typically rely on needs-based public benefits programs, including Supplemental Security Income (“SSI”) and Medicaid (known as “Medi-Cal” in California) to meet their ongoing, and often substantial, care needs. But in order to maintain eligibility for such benefits, the disabled individual must have no more than a very limited income, and only $2,000 or less in total assets. Thus, when individuals receiving such needs-based public assistance suddenly come into possession of even a modest sum of money, a common method utilized to preserve the individual’s access to these public benefits is the creation of a SNT. Assets held in a SNT are not counted as part of the benefit recipient’s assets for the purpose of determining eligibility for needs-based public assistance, thus enabling the disabled individual to retain the newly acquired funds without losing their benefits. All SNT’s fall into two basic categories: third-party SNT’s and first-party SNT’s.
A third-party SNT is a SNT established with the assets of someone other than the person with a disability. So long as the SNT beneficiary cannot control the amount or frequency of distributions of SNT assets, cannot revoke the SNT or access SNT funds for their personal benefit, the SNT assets are not countable for purposes of qualifying for federal needs-based public assistance.
In contrast, a first-party SNT is a federally authorized safe harbor trust that allows an individual to transfer his or her own assets into the SNT without being penalized by needs-based public benefit programs. Examples of first-party SNT’s include SNT’s established with a plaintiff’s litigation proceeds (sometimes referred to as a “litigation SNT”), or a “pooled SNT” where the assets are managed as part of a pool by non-profit organizations and pass to the state upon the beneficiary’s death.
Before And After The SNTFA
Prior to the passage of the SNTFA, disabled individuals who wanted to fund their own assets into an individual first-party SNT were not permitted to do so unilaterally without a court order. The operative statute at that time, limited individual first-party SNT’s to those “containing the assets of an individual under age 65 who is disabled . . . and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court[.]” As such, federal law did not permit recipients of public benefits who were otherwise mentally competent to establish their own individual SNT’s, and forced them instead to rely upon third parties or the courts. For years, practitioners chalked the statutory omission of the word “individual” from those permitted to establish the SNT to a drafting error, based upon the legislature’s false assumption that every individual who needed a SNT would lack the competency necessary to establish the SNT themselves. And many practitioners felt that it was demeaning—or outright prejudicial—to assume that all disabled adults lacked the requisite mental capacity to establish a SNT on their own, and therefore, to force those with full capacity to ask others, including parents, grandparents or the courts, to establish a SNT for them. Moreover, if resort was made to the courts, the courts could find cause to bring the SNT under ongoing court supervision, forcing the disabled individual to pay for ongoing and substantial attorney’s fees, bond and filing fees, and/or the cost of annual accountings.
But with one fell swoop, the SNTFA did away with this decades-old “drafting error” and added the term “individual” to the list of persons allowed to establish an individual first-party SNT. Thus, this change should now make it easier, and less expensive, for mentally competent disabled individuals to establish their own first-party SNT, and will be of tremendous benefit to clients of civil litigators and estate planners alike.
 See 42 U.S.C. §§ 1381, et seq.; Welf. & Inst. Code §§ 14000, et seq.
 See 42 U.S.C. § 1382b(e)(3)(A); 20 C.F.R. § 416.1201(a)(1)
 See 42 U.S.C. § 1396p(d)(4)
 See 42 U.S.C. § 1396p(d)(4)(A)
 See 42 U.S.C. § 1396p(d)(4)(C)
 42 U.S.C. § 1396p(d)(4)(A)
 Kevin Urbatsch, The Special Needs Trust Fairness Act , CANHR, April 3, 2017, http://canhr.org/publications/newsletters/NetNews/Feature_Article/NN_2016Q4.htm
 See 42 U.S.C. § 1396p(d)(4)(A)