Can a special needs trust own shares in a family business?

Navigating the complexities of special needs trusts and family businesses requires careful consideration, but it is absolutely possible for a special needs trust to own shares in a family business, with appropriate structuring and adherence to regulations. This ownership can provide a significant income stream for the beneficiary without disqualifying them from crucial needs-based government benefits like Supplemental Security Income (SSI) and Medicaid. However, it’s not a simple plug-and-play situation; careful planning with an experienced estate planning attorney, like Steve Bliss here in Temecula, is crucial to ensure compliance and protect the beneficiary’s benefits.

What are the Biggest Concerns When a Special Needs Trust Owns a Business?

One of the primary concerns is how the income generated from the business ownership will be treated. SSI and Medicaid have strict income limits. If the trust receives income that exceeds these limits, the beneficiary could lose benefits. Therefore, the trust must be structured to distribute income in a way that complies with these regulations. Distributions can be made for the beneficiary’s “supplemental” needs – those not covered by government programs – such as recreation, travel, and personal care. Approximately 1 in 5 Americans have some type of disability, and many rely on these critical programs. It’s estimated that over 15% of those receiving SSI would be negatively impacted if their trust wasn’t managed correctly.

How Does California Law Impact This Ownership?

California, like many states, allows for the creation of both first-party and third-party special needs trusts. A third-party trust is funded with someone else’s assets (e.g., a parent or grandparent), while a first-party trust is funded with the beneficiary’s own assets, often from a settlement or inheritance. The type of trust impacts how income is treated. Because California is a community property state, any assets acquired during a marriage are owned 50/50. This becomes particularly relevant if the family business was established or expanded during the marriage. The “double step-up” in basis for surviving spouses can offer significant tax benefits, but it’s crucial to plan proactively. The formal probate process is required for estates exceeding $184,500, with statutory fees for executors and attorneys potentially reaching 4-8% of the estate value. Avoiding probate through a properly structured trust is often a significant benefit.

What are the Risks If It’s Not Done Correctly?

I recall a situation with a client named David, whose son, Michael, had Down syndrome. David owned a small vineyard and wanted Michael to benefit from the income. He attempted to simply transfer shares directly to a trust he created himself, without consulting an attorney. Unfortunately, the trust was not properly drafted, and the income from the vineyard immediately disqualified Michael from receiving crucial Medicaid benefits, costing the family tens of thousands of dollars annually. It was a painful lesson. This highlights the importance of meticulous planning and legal expertise. A properly structured trust, drafted by an attorney like Steve Bliss, can prevent these kinds of heartbreaking outcomes.

How Can a Trust Be Structured to Mitigate These Risks?

Fortunately, the story doesn’t end there. Another client, Sarah, came to Steve with a similar situation. Her family owned a successful bakery, and she wanted to ensure her daughter, Emily, who has cerebral palsy, could benefit from the business income without losing her benefits. Steve recommended a carefully crafted third-party special needs trust with a qualified trustee who understood the intricacies of SSI and Medicaid regulations. The trust was designed to receive distributions from the bakery, and those distributions were used solely for Emily’s supplemental needs. The trustee meticulously documented all expenses and ensured compliance with all applicable rules. The result? Emily continued to receive her benefits *and* enjoyed a higher quality of life thanks to the additional resources. A key component of managing the trust is adhering to the California Prudent Investor Act when making investment decisions. Furthermore, any no-contest clause in the trust would be narrowly enforced, only applicable if a beneficiary directly contested the trust without probable cause. If there were no will, Sarah, as the surviving spouse, would inherit all community property, and the separate property would be divided according to a set formula. It’s also imperative that the trust explicitly authorize the trustee to access and manage Emily’s digital assets, like online accounts and social media.

Steve Bliss, ESQ. at The Law Firm of Steven F. Bliss is a leading expert in special needs trusts and estate planning. He can help you navigate the complexities of owning a family business while protecting the financial future of your loved one with special needs. Don’t leave something so important to chance. Protect your family’s future – and your peace of mind.

Call today for a consultation: (951) 223-7000

Don’t let a lack of planning leave your loved ones vulnerable. Secure their future, today.