A special needs trust (SNT) is a legal tool that provides for a disabled beneficiary without disqualifying them from government benefits like SSI and Medi-Cal. But one mistake in the trust language—or simply leaving money directly to your disabled child—can trigger benefit disqualification that costs your family over $100,000 in lost support.
The Stakes: What Your Loved One Could Lose
If your disabled family member receives SSI (Supplemental Security Income) and Medi-Cal (California's Medicaid), they're entitled to:
SSI Benefits:
- Monthly cash benefit (up to $1,033/month in California for 2025)
- Automatic Medi-Cal eligibility in California
- Potential housing and food assistance
Medi-Cal Benefits:
- Full medical coverage
- Prescription drugs
- Hospital and doctor visits
- Personal care services
- Mental health services
- Long-term care if needed
The asset limit for SSI eligibility is just $2,000. Receive an inheritance of $50,000? Your loved one is immediately over the limit and loses benefits until that inheritance is spent down.
The real cost: Beyond the immediate benefit loss, your loved one loses ongoing support that could total $100,000+ over their lifetime, and they lose the safety net that provides for unexpected needs.
Mistake 1: Leaving Money Directly to Your Disabled Child
The scenario: Your will or trust says "I leave my estate equally to my three children: John, Sarah, and Michael." Michael has a disability and receives SSI.
What happens: Michael receives his share outright. He's immediately over the $2,000 asset limit. SSI stops. Medi-Cal stops. He must spend down the inheritance to regain eligibility.
The fix: Leave Michael's share to a properly drafted special needs trust. The trust can supplement his care without disqualifying him from benefits.
Mistake 2: Using a Generic Trust Template
The scenario: You create a trust with online forms or generic templates. The trust says it's for Michael's "support" or "care."
What happens: If the trust can be used for food or shelter, it's a "countable resource" for SSI purposes. Michael may lose benefits even though the money is in a trust.
The fix: Special needs trusts require specific language. The trust must:
- Be for "supplemental" needs only
- Expressly state it does not provide food and shelter as a primary purpose
- Give the trustee (not the beneficiary) complete discretion
- Include language satisfying SSI requirements
Generic templates almost never include proper special needs language.
Mistake 3: Naming the Wrong Trustee
The scenario: You name Michael as trustee of his own special needs trust, or you name a co-trustee arrangement that gives Michael control.
What happens: If Michael has any control over trust distributions, the trust is considered his asset and counts against the $2,000 limit.
The fix: The beneficiary of a special needs trust can never be the trustee or have any control over distributions. Name a reliable family member, friend, or professional trustee.
Mistake 4: Not Providing Trustee Guidance
The scenario: You create a proper special needs trust but give no guidance about what Michael needs, what brings him joy, or how to communicate with him.
What happens: The trustee is left guessing. They may make decisions that don't serve Michael well, or they may be too conservative and fail to use trust funds to improve his quality of life.
The fix: Create a "Letter of Intent" (also called a "Life Care Plan") that provides detailed guidance about:
- Michael's daily routine and preferences
- Medical needs and providers
- Communication strategies
- Activities and interests
- Important relationships
- Quality of life priorities
Mistake 5: Forgetting About the Payback Requirement
The scenario: Michael receives a personal injury settlement or inheritance from someone who didn't know about special needs planning. The money goes into a "first-party" special needs trust (one funded with Michael's own money).
What happens: First-party SNTs require that remaining funds at Michael's death go to reimburse Medi-Cal for benefits paid during his lifetime. This "payback" can consume most of the trust.
Understanding the difference:
- Third-party SNTs (funded with other people's money): No payback requirement
- First-party SNTs (funded with beneficiary's money): Medi-Cal payback required
The fix: Use third-party SNTs whenever possible. If a first-party SNT is necessary (for inheritances or lawsuit settlements), work with an attorney to maximize benefits while understanding the payback limitation.
Mistake 6: Failing to Coordinate with Other Family Members
The scenario: You create a perfect special needs trust for Michael. But Grandma doesn't know about it and leaves Michael $20,000 outright in her will.
What happens: Michael receives the inheritance directly, loses benefits, and must spend down the money or transfer it to a first-party SNT (which has the payback requirement).
The fix: Communicate with everyone who might leave Michael money:
- Grandparents
- Aunts and uncles
- Godparents
- Family friends
Provide them with your trust information so they can name the trust as beneficiary instead of Michael directly.
Mistake 7: Not Funding the Trust Properly
The scenario: You create a special needs trust in your estate plan, but you never actually transfer assets into it or name it as beneficiary of your life insurance.
What happens: At your death, assets pass outside the trust and may go directly to Michael, disqualifying him from benefits.
The fix:
- Name the SNT as beneficiary of life insurance policies
- Name the SNT as beneficiary of retirement accounts (with care—tax implications exist)
- Ensure your will or revocable living trust pours assets into the SNT
- Review beneficiary designations regularly
What a Proper Special Needs Trust Includes
A well-drafted third-party special needs trust should include:
- Proper supplemental support language - Trust provides for needs not covered by government benefits
- Trustee discretion - Beneficiary has no control over distributions
- Spendthrift protection - Creditors cannot access trust funds
- Medi-Cal payback waiver (for third-party trusts) - No reimbursement required at beneficiary's death
- Remainder beneficiary designation - Who receives remaining funds when beneficiary dies
- Trustee guidance - What the trust is intended to provide
- Trustee succession - Who takes over if the first trustee can't serve
Building Protection That Works
At Bordeaux Legacy Law, we understand special needs planning from personal experience and professional expertise. We help families:
- Create properly drafted special needs trusts
- Coordinate with other family members' estate plans
- Develop comprehensive Letters of Intent
- Navigate the complex interaction between trusts and government benefits
- Plan for the lifetime of a disabled loved one
Frequently Asked Questions
What can a special needs trust pay for?
A third-party SNT can pay for almost anything that improves quality of life: vacations, entertainment, education, therapy, personal care attendants, home modifications, vehicles, electronics, clothing, and much more. It should generally avoid paying for food and shelter, which can reduce SSI benefits.
Will a special needs trust affect my child's SSI?
A properly drafted third-party special needs trust should not affect SSI eligibility. The key is that the beneficiary has no control over the trust and it's structured for supplemental needs only. This is why proper drafting is essential—generic trusts often fail this test.
Who should be the trustee of a special needs trust?
Choose someone who understands your loved one's needs, can navigate bureaucracy, is financially responsible, and is likely to outlive you. Many families use a combination: a family member as co-trustee for personal knowledge, and a professional trustee for financial management.
What happens to the trust when my child dies?
For third-party SNTs, remaining funds pass to the remainder beneficiaries you name—often siblings or other family members. There's no Medi-Cal payback requirement. For first-party SNTs, Medi-Cal must be reimbursed first, then any remainder goes to the beneficiary's estate.