Special Needs Trust Fairness Act, signed into law by President Obama on December 17, 2016.

Dear Readers:

Every once in awhile, we stray from our letter and response format to advise you directly about topics of some importance. Today, we want to talk to you about the Special Needs Trust Fairness Act, which was signed into law by President Obama on December 17, 2016.

A Special Needs Trust (SNT) is a trust designed to protect the assets or inheritance of a disabled person, so that person could receive needs-based benefits such as Medi-Cal and Supplementary Support Income (SSI).  These trusts are drafted in such a manner that the assets held within them do not count as assets that are available to the disabled beneficiary.

There are several kinds. The most common SNT, and the most flexible, is a “ir rty” SNT usually created by the parents or other loved ones of a disabled person. Regretfully, sometimes people do not have an SNT in their estate plan to benefit a disabled child. When a disabled person inherits assets and there’s no SNT to hold them, the disabled person will lose his or her benefits, which can be devastating.

The solution in cases like this, where it’s too late for the parents to create an SNT, is to create a different form of SNT for the disabled beneficiary, known as a “First Party” SNT, or a “d4A” SNT (named after the federal law authorizin its creation).

The difficulty in creating a d4A SNT was that it couldn’t be created by the disabled person - it had to be created by a living parent or grandparent, or by the court. This meant that a disabled person’s inheritance would be diminished by the legal fees and costs of a court petition seeking an order authorizing the creation of the trust.

The SNT Fairness Act fixes all of this. Now, instead of having to go to court, a disabled person may create his or her own Special Needs Trust.  This new law will save a lot of money for people who need a lot of help. From now on, the only time court involvement will now be necessary is if the disabled person in mentally incapacitated and does not have a valid Durable Power of Attorney authorizing the creation and funding of a trust.

There are drawbacks to d4A SNT’s. The disabled beneficiary cannot be the trustee. The trust also has to pay back Medi-Cal upon the disabled person’s death. However, this sort of SNT is in many cases the best of a number of poor alternatives.

If you have a disabled family member, it is very important that you provide for this person within your estate plan, in most cases with a Special Needs Trust.

Len & Rosie