As long as your beneficiary qualifies, you may set up a special needs trust for them in California. It’s better to pass on assets to them through this type of trust than a will or a living trust because it comes with important benefits.
The main reason why you should set up a special needs trust while estate planning is it protects your beneficiary’s eligibility for government benefits. When someone receives an inheritance or other gifts through a will or a living trust, they could lose Medi-Cal, SSI and other government benefits. They would only qualify for benefits again after exhausting the inheritance that they received.
How a special needs trust works
Beneficiaries can’t revoke their special needs trusts. They also can’t manage the assets. These are two reasons why California allows special needs trusts to not affect the beneficiary’s eligibility for government benefits.
Types of special needs trusts
Two types of SNTs in California are third party and first party. Beneficiaries have no control over a third-party SNT. As with a living trust, the SNT will have a trustee whom you designate. The trustee is responsible for managing the trust based on the rules of the account. Beneficiaries may use the assets for transportation costs, computer equipment, furniture, pet supplies, classes, hobbies, personal services, professional fees, vacations and luxury items.
A first-party special needs trust holds assets that belong to the beneficiary rather than the parents. Examples of assets that go into a first-party special needs trust are personal injury awards, life insurance, divorce settlements and retirement plans. Other terms for this type of financial account are self-settled, D(4)(a), litigation and payback special needs trusts.
If you have a special needs child, it’s important to set up a special needs trust for them as soon as possible. An inheritance that they receive outside of this type of financial account could disqualify them for government benefits, even if it’s a small inheritance.