California Special Needs Trust – Proceed With Caution

California Special Needs Trust – Proceed With Caution

By Attorney Paul Hanks, Ironclad Living Trusts 

Parents who have an adult disabled child often look to a third party Special Needs Trust as the trust of choice. The decision regarding whether a Special Needs Trust is appropriate should not be one of the heart but one of the mind. There are many cautionary flags to raise with regard to estate planning for a special needs disabled child. Indeed, there are so many drawbacks to a Special Needs Trust that this law firm authored another Blog on the topic of Disinheriting a Disabled Beneficiary in California. 

Many damaging consequences can result from a Special Needs Trust. This Blog is focused on the third party special needs trust on behalf of an adult disabled beneficiary funded through an inheritance. The overriding purpose of such a trust is to protect the special needs trust beneficiary’s eligibility for government funded benefits such as SSI and Medi-Cal eligibility. 

Despite the foregoing benefit of a third party special needs trust, it creates a pathway fraught with risks. A topic which does not receive much attention are the many negatives associated with a third party special needs trust.

At the outset it cannot be overemphasized that a third party Special Needs Trust is very complex. The most colossal misstep is appointing an unqualified person to serve as the trustee of the third party Special Needs Trust. Often the creators of a Special Needs Trust automatically look to a family member to serve as successor trustee. 

When a family member serves as the successor trustee under a third party Special Needs Trust, often that family member has no idea of the complexity of the job they have inherited. Rigid compliance with multiple state and federal laws is mandatory. There are meticulous expenses tracking requirements. Expenses also must be properly allocated. Special Needs Trust accounting is much more complex than a tax return. And indeed, a tax identification number must be assigned to the Special Needs Trust.

Audits of third party Special Needs Trusts are common. Often the government funded benefits of the special needs trust beneficiary are jeopardized due to inadequate accountings and funds that are misapplied. The earmarking of funds under a Special Needs Trust derives from a web of complex regulations. A single misstep by the trustee under a third party Special Needs Trust can prove to be very damaging to the interests of the special needs trust beneficiary.

In summary, the complexity of a third party Special Needs Trust is often overlooked by the trust creators and the successor trustee. The consequences can be very costly to the special needs trust beneficiary and irreversible. An experienced trust and estates law firm can objectively assess the feasibility and utility of a third party Special Needs Trust. 

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