California Special Needs Lawyer Answers, "What Happens to a Special Needs Trust When a Beneficiary Dies?"
Last updated 3/18/2021 at 10:26am
Parents of children with disabilities often set up a specific type of trust that allows for the beneficiary to utilize the assets in the trust without interfering with their access to benefits such as Medi-Cal and SSI. This trust, called a Special Needs Trust, can help ensure that the beneficiary will be provided with the necessary resources for his or her lifetime. However, if the beneficiary passes away before the assets held in the trust are depleted, the trustee will need to go through the appropriate legal process to terminate the trust and manage any remaining assets.
Will the Assets Go Back to the Government?
Depending upon the type of Special Needs Trust created, some of the remaining assets may need to be returned to the government to pay back public benefits, including Medi-Cal. If the funds initially deposited into the trust came from the beneficiary themselves, such as money from a lawsuit or settlement, setting up a “first party” trust would have been necessary. With this type of trust, any benefits paid out to the beneficiary prior to their death will likely need to be paid back to the government.
However, if the assets in the trust came from parents, grandparents, or others who are providing their own money for the care of the beneficiary, a “third party” Special Needs Trust would have been created.
With this type of trust, the assets aren’t considered to be owned by the beneficiary as long as the trust is set up correctly. Therefore, the funds do not need to be used to pay back Medicaid or other public benefits when the beneficiary dies.
A third type of trust, referred to as a pooled trust, is usually administered by a non-profit for the beneficiary. These trusts often contain a provision that calls for the assets to be paid to the government once the trust is terminated.
What Happens to the Assets in a Third-Party Trust?
As previously stated, the assets in a third-party trust do not need to be used to pay back the government. Instead, these assets will be distributed to residual beneficiaries -caregivers, siblings, a specific charity – as decided by the person who created the trust.
During the process of terminating the trust, the assets will first be used to pay any taxes, liens, or other final expenses such as medical bills. Hiring an attorney who is experienced with Special Needs Trusts can be helpful when it comes to transferring assets into a separate trust if any of the residual beneficiaries are minors or also have disabilities.
– Robert Galliano, Attorney at Law, Copenbarger & Copenbarger, LLP