Court-Established Special Needs Trusts

Safeguard benefits while managing inherited or awarded funds.

TRUSTS SET UP FOR THE COURT (AKA 1ST PARTY SNTS)

General Questions That Can Arise

There are 2 typical types of 1st party special needs trusts:

(i) An inheritance/gift SNT where the special needs person receives an inheritance or a gift.
(ii) A litigation SNT where the special needs person receives funds arising from a settlement or judgment in a personal injury lawsuit.  

Eligibility for SSI and Medi-Cal is based on one’s means.  An individual cannot have more than $2,000 of “non-exempt” assets (such as cash or stock) to qualify for SSI and/or Medi-Cal.  In both the above situations, a $100,000 inheritance or award in a lawsuit would render that person no longer eligible for public benefits for the month after s/he received the benefit.  Establishing an SNT through the court is one way that those funds can be placed in a way that the disabled person can maintain his/her benefits. **

There are, however, several downsides to establishing an SNT through a court order that do not apply to 3rd-party SNT.  The main one is that the trust will continue to be subject to the jurisdiction of the probate court.  This means that:

  • Accounts will have to be filed with the court at the end of the first year of the trust and every two years after that (though this requirement may be waived if the amount in the trust is small enough);
  • The trustee will have to be “bonded.”
  • There are restrictions on the type of investments that the trustee can invest in.
  • If the trustee resigns, his/her successor must be first approved by the court;
  • Restriction on use of assets.  For example, prior court approval is often required if the trustee wishes to purchase a house, a car, or a life insurance policy.
  • When the disabled child dies, whatever funds are left in the trust must be used first to pay off any—and there are more!

At the Law Offices of Patrick McNally, we can assist both the disabled person’s family and, in the case of a litigation SNT, the attorney for the disabled person in navigating the treacherous waters of 1st party trusts so that, in the case of an attorney, they avoid liability for failing to effectively protect eligibility or address issues such as Medicare liens, motions to seal, etc.

** NOTE:  Establishing a special needs trust is just one of several options that can be utilized to allow the disabled person to receive those “illegible” funds and still maintain his/her benefits.  We can advise on all options and assist the disabled person and his/her family in selecting the optimal option under the circumstances.