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What Laguna Niguel Residents Need to Know About Special Needs Trusts

Posted by James Burns | May 18, 2022 | 0 Comments

There are several types of Special Needs instruments available and each one has a different fit. This article is designed to cover the main two (First & Third Party) but there are many more and what is important is that not all situations can use a template, or no one size fits all. It pays to have competent counsel when moving forward to protect you loved one's benefits.


“First Party” Special Needs Planning is designed to preserve need-based public assistance, such as Medicaid and Supplemental Security Income, when settlements are received, verdicts are awarded, or when disabled individuals with assets desire to shelter those assets to qualify for such assistance. It is possible, through proper special needs planning, for a disabled individual to have the benefit of their settlement, award, or assets, while maintaining their eligibility for public benefits. Congress has provided, through 42 U.S.C. 1396(p) (d) (4) (a) and (c), mechanisms whereby this can be accomplished. This is called “first party” special needs planning, because it shelters the disabled individual's own funds, preserving them for that disabled person's benefit.

A Special Needs Trust allows a disabled individual to retain eligibility for needs-based government assistance programs. When properly created, the Special Needs Trust assets are excluded d from the $2,000 limit on resources imposed for SSI eligibility [42 U.S.C. § 1396p]. The Court must make specific findings pursuant to Probate Code §3604(b) when authorizing transfer of funds to a Special Needs Trust created for that purpose, which includes:

  1. That the minor or incompetent person has a disability that impairs the individual's ability to provide for the individual's own care or custody and constitutes a substantial handicap.
  2. That the minor or incompetent person is likely to have special needs that will not be met without the trust.
  3. That the money to be paid to the trust does not exceed the amount that appears necessary to meet the special needs of the minor or incompetent person.

In sum, by using a Special Needs Trust the injured individual is not disqualified from public benefits due to the settlement. The assets in the Special Needs Trust are not counted as assets when calculating financial need, and the settlement funds can be used for medical needs and services not covered by public benefits in whole or in part.

When a Special Needs Trust is not used to receive settlement proceeds, the recovering individual temporarily loses their public benefits and must spend settlement funds down to the allowable $2,000, and then go back on SSI and Medi-Cal, creating a huge doughnut hole that adversely effects their award or settlement funds.


“Third Party” Special Needs Planning is like “first party” planning in that it is designed to protect the public benefits eligibility of disabled individuals, but it differs as to whose money is being protected. With “third party” planning, someone other than the disabled person is earmarking their own assets for the benefit of the disabled person. Rather than giving the disabled party direct access to the funds, the third-party places certain restrictions on how the funds can be utilized. Because of these restrictions (known as “special needs” restrictions), the disabled person can continue to receive their need-based assistance despite the existence of the third-party's earmarked funds.


Joseph, age 11, is receiving SSI and Medicaid. Joseph is eligible for SSI because of his financial need and disability. He is eligible for Medicaid because, in Florida, an individual who receives SSI is automatically eligible for Medicaid. Both programs depend upon Joseph's continued financial need. Joseph's grandmother leaves Joseph a $100,000.00 inheritance when she passes away. According to her Last Will and Testament, this money goes directly to Joseph. Because of his age, it winds up in a guardianship account that is established for him. Because Joseph has received the inheritance the government takes away his benefits, claiming that Joseph no longer needs their assistance. It does not matter that the funds are in a guardianship account and that Joseph does not have direct access. Until the money is gone or sheltered, Joseph cannot re-qualify for benefits. If Joseph wants to shelter the inheritance, he will have to do “First Party” special needs planning because the money is now his. This could take the form of a special needs trust, but first party special needs trusts are required to contain government reimbursement provisions.


A 38-year woman is severally injured in an accident. After 2 years of court involvement the woman settles her personal injury case for a lump sum upon the advice of her personal injury attorney. She later sues the attorney and guardian ad litem for malpractice. She alleged that the defendants: (i) failed to consult competent experts concerning a structured settlement and (ii) failed to plan to preserve her SSI and Medicaid eligibility. In a real case the Plaintiff alleged that a structured settlement with a d(4)(A) Special Needs Trust (“SNT”) would have protected her personal injury settlement from dissipation, provided tax benefits, and protected her SSI and Medicaid benefits. The case was settled by all defendants for a combined sum of $4.1 million.

If you are a personal injury attorney you may want competent counsel to assist prior to PAYOUT OF THE SETTLEMENT.

Special Needs Trusts to Protect Public Benefits:

The courts have held that not considering and planning for the client's means-tested government benefits can result in a legal malpractice claim, Grillo v. Pettiette et al., 96-145090-92 (96th Dist. Ct., Tarrant Cty., Texas); and Grillo v. Henry Cause, 96-167943-96, (96th Dist. Ct., Tarrant City, Texas), or a breach of fiduciary duty or dereliction of duty if not considered by a fiduciary or denied by a court, Department of Social Services v. Saunders, 247 Conn. 686, 724 A.2d 1093 (1999). Clients receiving Medicaid, which can come in the form of health insurance benefits, long-term care, and waiver programs for those with intellectual disabilities, family support, technology assistance, home, and community-based care, etc., must be advised that receiving the settlement proceeds will endanger these benefits. In the case of waiver benefits, there are often long waiting periods before the individual can receive these waivered benefits again if the client loses eligibility. The timing of the payout and the planning is especially important for them. Creating and funding a special needs trust pursuant to 42 U.S.C. 1396p (d) (4) will preserve these benefits.

Both stand-alone special needs trusts (SNTs) created under (d) (4) (A) and pooled special needs trusts (PSNTs) created under (d)(4)(C) are options to consider.

The three biggest areas of improper planning for any Special Needs Trust seems to be as follows:

  1. Integrating Special Needs within an ordinary revocable living trust or testamentary Will. While the appearance of integrating a third party SNT in a will or revocable trust makes drafting simpler, is typically less expensive, and cuts down on the number of documents comprising a client's estate plan. The big disadvantage for having a testamentary trust is that it does not exist until someone dies. If other family members want to provide a gift or inheritance to the person with a disability, they cannot do so until the people who set up the documents pass away. Other shortcomings are the boilerplate provisions for a typical will or revocable trust are stereotypically imagining a short administration. However, a SNT may certainly exist for years.

We believe the Special Needs Trust should be standalone to prepare for a number of unknowns. If a Will or even a problem with the revocable living trust required Probate, then as a standalone the privacy of the afflicted person is maintained and not made public as any court filing. Another situation that occurs frequently is that the SNT must be submitted to the Social Security Administration or state human services agency, employees of those agencies do not see provisions for other beneficiaries and will not be distracted or confused by provisions that do not apply to the SNT. Finally, where other beneficiaries are privy to a copy of the trust upon the departure of the Trustors, the SNT will be outside and remain confidential. There are also a number of other scenarios that can occur which bolsters the idea that standalone is the preferred method to appreciate and care for our disabled.

  1. Not using Professional Trustees. Not using a corporate service or professional fiduciary can set up a SNT for a possible improper distribution. The SNT trust provides for supplemental and emergency funding for the afflicted beneficiary and is not meant to replace or remove them from any government benefit they are currently receiving.

While it might seem cost-effective to appoint a family member as the trustee of a SNT trust it can also be super costly if they get it wrong due to a poor fund of knowledge on rules of distributions on SNT. We always recommend to clients they consider a professional service to oversee the SNT to provide for the highest preservation of the assets and the benefits the beneficiary is receiving.

  1. Not issuing notice to other family members. While rarely practiced it is a promising idea to identify other family members who may want to leave something to the disabled beneficiary so that a distribution from their estate does not go directly to the disabled beneficiary and disqualify them from receiving their government health care or income.

Again, another great reason to use the standalone 3rd Party SNT is to provide for other family members who may want to leave the disabled beneficiary a gift from their estate. There have been occasions where a family member e.g., aunt, grandparent etc. leaves a gift that exceeds the assets and income ratio for a disabled person and would affect their government benefits or even disqualify them.

the Law Office of James Burns has assisted in numerous cases doing pre-planning with First Party Special Needs Trust or Pooled Special Needs Trusts so that a Plaintiff's settlement does not disrupt government medical coverage and preserves it after receiving the settlement.

About the Author

James Burns

Estate Planning, Asset Protection, Business and Real Estate Transactions, nutraceutical Law and franchising:


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