How Does a Special Needs Trust Work

Emily just received a settlement from a personal injury claim for her son, Kai, who has cerebral palsy. She’s understandably relieved, but also terrified. A lump sum inheritance will disqualify Kai from crucial needs-based benefits like Supplemental Security Income (SSI) and Medi-Cal. That’s where a Special Needs Trust (SNT) comes in. It’s a complex tool, but essentially a way to hold assets for someone with disabilities without impacting their eligibility for government assistance. As an Estate Planning Attorney and CPA with over 35 years of experience, I guide families through these challenges daily, and I want to explain how SNTs function and why a CPA’s insight is vital.

What are the Different Types of Special Needs Trusts?

There are two primary types: First-Party and Third-Party SNTs. A First-Party SNT, also known as a (d)(4)(A) trust, is funded with the beneficiary’s own assets – like the settlement Emily received for Kai. These trusts require a “payback provision,” meaning any remaining assets in the trust upon the beneficiary’s death must first reimburse the state for benefits they received over their lifetime. This is a critical element; without it, the trust won’t qualify for Medicaid.

A Third-Party SNT is funded with assets from someone other than the beneficiary – for example, from your estate, gifts from relatives, or an inheritance you designate. These trusts don’t require the payback provision, offering greater flexibility in how the remaining assets are distributed. The choice between the two depends entirely on the source of the funds.

How Does a Third-Party SNT Protect Government Benefits?

This is the core function. Because the assets aren’t owned by the beneficiary, they don’t count towards the resource limits for SSI and Medi-Cal. The trust itself has a trustee – someone you appoint to manage the funds responsibly. The trustee can use the funds for a wide range of supplemental needs, those not covered by government programs. Think therapies, specialized equipment, recreation, travel, and even personal care. However, strict rules govern distributions. The trustee cannot provide funds for housing, food, or clothing if those needs are already met by government assistance.

Why is a CPA Crucial in Setting Up a Special Needs Trust?

This isn’t just about legal paperwork. As a CPA, I understand the complex tax implications and the vital importance of the “step-up in basis.” If you contribute appreciated assets to a Third-Party SNT, the assets receive a new cost basis equal to their fair market value at the time of contribution. This means when those assets are eventually sold, the capital gains tax liability is minimized. Further, properly valuing assets placed into the trust is critical. Undervaluing can trigger IRS scrutiny. And understanding the long-term financial impact of the trust on the beneficiary’s overall financial picture is something an attorney alone often overlooks.

What Happens When the Beneficiary Passes Away?

For a First-Party SNT, the state has a claim on any remaining assets to recoup benefits paid. For a Third-Party SNT, you determine the beneficiaries in your trust document. You can direct the assets to other family members, charities, or even back to your estate. While California allowed temporary remote witnessing during the pandemic, the law (CPC § 6110) has reverted to requiring strict simultaneous presence; remote signatures are generally invalid for Wills unless they meet the narrow ‘Electronic Will’ standards of AB 298.

What if a Will Containing the SNT is Improperly Executed?

This is a surprisingly common problem. If a Will is invalidated, assets fall under intestacy; however, for deaths on or after April 1, 2025, estates with personal property under $208,850 (per CPC § 13100) may still bypass full probate via affidavit. Even with a valid Will, an ‘interested witness’ (a beneficiary) triggers a legal presumption of duress or fraud. Unless there are two other disinterested witnesses, the beneficiary may lose their gift, taking only what they would have received under intestacy rules (California Probate Code § 6112). Including a self-proving affidavit allows the Will to be admitted to probate without the testimony of the subscribing witnesses, significantly accelerating the court’s approval process (Probate Code § 8220). Furthermore, the court may validate a signature-defective Will if there is ‘clear and convincing evidence’ of the testator’s intent; however, this requires a costly court petition and is not a guaranteed safety net (Probate Code § 6110(c)(2)).

What does a California probate court look for when interpreting testamentary intent?

In California, a last will and testament is reviewed under probate standards that focus on intent, capacity, and execution. Clear drafting reduces ambiguity, limits misinterpretation, and helps families avoid unnecessary conflict during estate administration.

To create a valid document, you must ensure the signer has testamentary capacity, strictly follow will legal requirements, and ensure you are correctly naming the testator to prevent identity disputes.

For California residents, understanding how intent, authority, and compliance interact is one of the most effective ways to protect family harmony and estate integrity. A will that anticipates probate scrutiny is far more likely to be honored as written and far less likely to become the source of unnecessary conflict.

Resources for Legal Standards & Probate Procedure

• Riverside Local Rules: Riverside Superior Court – Probate Division
  Access the essential “Local Rules” (Title 7) effective January 1, 2026. This includes mandatory e-filing procedures, current Probate Examiner notes, and specific requirements for remote appearances via the court’s designated platform for non-evidentiary hearings.
• Attorney Verification: State Bar of California
  The official regulatory body for California attorneys. Use this to verify a lawyer’s “Certified Specialist” status in Estate Planning or to access 2026 guidelines on the ethical handling of Client Trust Accounts (IOLTA).
• Self-Help & Forms: California Courts – Wills, Estates, and Probate
  The Judicial Council’s official portal. It includes the updated 2026 forms for the $208,850 personal property threshold and the $750,000 “Primary Residence” simplified transfer procedure (AB 2016).
• Federal Estate Tax: IRS Estate Tax Guidelines
  The authoritative federal resource for estate and gift tax filing. It reflects the 2026 “OBBBA” permanent exemption of $15 million per individual, replacing the previously scheduled Tax Cuts and Jobs Act (TCJA) sunset.