You may have heard that special needs trusts are required to reimburse the government for MediCal expenses incurred by the trust’s beneficiary when she passes away, and, in some cases, this is true. But not all special needs trusts are required to contain this type of “payback” provision, so if you are worried that the trust funds will go to pay back the government, you may not have anything to fear.
If a parent, grandparent, family friend or any other interested person wants to set up a special needs trust for a person with special needs, they will typically create a “third-party” special needs trust. The trust is called a “third-party” trust because it is funded with assets that do not belong to the person with special needs. These trusts are commonly used by family members to set aside inheritances for, or to simply provide additional assistance to, a family member with special needs. If properly created and funded, the assets in a “third-party” trust will not count as the beneficiary’s funds if or when she applies for benefits like Supplemental Security Income (SSI) or MediCal. Most importantly, a properly designed “third-party” special needs trust does not have to include a payback provision, meaning that the government has no right to the funds when the beneficiary dies.
On the other hand, if a person with special needs wants to place her own funds into trust, she has two main options – transfer the funds into a trust established for her benefit by a parent, grandparent or court called a “first-party” special needs trust (because the assets come from the person with special needs herself) or transfer the funds into a pooled disability trust that is run by a non-profit organization. In almost every case, these types of trusts must contain payback provisions in order for the beneficiary to avoid a loss of government benefits due to excess assets.
In many cases, a family member looking to fund special needs trust for a person with special needs will utilize a “third-party” special needs trust that doesn’t contain payback provisions and that provides enormous benefits to the person with special needs. Even if the trust does contain a payback provision, in some cases where the beneficiary exhausts all of the trust’s assets, there may still not be a government payback at all.
* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.