Special Needs Trusts in California: Latest Court Guidance & Benefit Protection Strategies

What Is a Special Needs Trust & Why Do California Families Need One?

If you have a loved one with a disability or special needs, you know how important it is to protect their long-term care—while keeping critical public benefits like SSI and Medi-Cal intact. A Special Needs Trust (SNT) lets families set aside money to pay for a beneficiary’s “extras” or quality-of-life needs, without disqualifying them from those essential government programs.But let’s be real: the rules can get confusing. And with recent California court decisions and new state laws, even experienced trustees and attorneys are double-checking best practices. Here’s the latest, plain-English breakdown for families and professionals in California.

Courtroom Clarity: The McGee Decision & What It Means

The recent California case of McGee v. Department of Health Care Services (2023) 91 Cal.App.5th 1161 made headlines—and brought much-needed clarity. Here’s why it matters:

• The trial court had wrongly said that SNTs couldn’t pay for things like food for the beneficiary, pet care, or other “everyday” expenses.
• On appeal, the court said, “Not so fast.” SNTs are designed to supplement public benefits, not just narrowly defined ‘extras’.
• In McGee, the court emphasized that SNTs are not limited to covering only narrowly defined “extras.” If an expense improves the beneficiary’s quality of life and does not duplicate what public benefits already provide, it may be allowed—even if it supports everyday living needs.

Key takeaway: Special needs trusts should be used to enhance quality of life, not just cover what public benefits miss by the tiniest margin.

Goodbye, Outdated Limits: The Scott v. McDonald Depublication

For years, confusion reigned about whether SNTs could pay for basic needs. The now-depublished case Scott v. McDonald once said some pretty restrictive things—like that trustees couldn’t pay for food or transportation unless the trust was a “Support Trust.” The California Supreme Court has since “depublished” this case, meaning it’s no longer used as legal precedent.Why does this matter?

• It clears the way for more flexible SNT spending, provided the trust still follows benefit protection rules.
• Families and trustees can feel more confident that supporting things like meals, clothing, or even a pet’s care are fair game—if they’re done right.

New Law for 2025: Court-Ordered Child Support Can Go Into a SNT

Here’s a HUGE win for families: In 2024, California’s AB 2397 was signed into law. Under AB 2397, courts may order child support to be paid into a properly structured special needs trust. The court must approve the trust and direct the payments. The trustee must make distributions that do not count as income to the child’s SSI/Medi-Cal eligibility—usually by paying service providers directly and avoiding any cash payments to the beneficiary. (Welf. & Inst. Code § 14005.12, as amended by AB 2397 (2024))Tip: If your family is going through a divorce, make sure your attorney understands and leverages this new law to protect your child’s eligibility.

Special Needs Trust Administration: What’s Allowed and What Isn’t?

Let’s boil it down. Post-McGee and under current law, SNTs must be managed to supplement (not replace) public benefits. Here’s how to keep your trust in the safe zone:

What Trustees Can (Usually) Pay For

• Food & Personal Nutrition: Trustees can pay for food and groceries, but these may reduce SSI benefits due to Social Security’s in-kind support and maintenance (ISM) rules. Always consult with a benefits advisor before making regular food or housing payments.
• Clothing & Personal Items: Anything above the basics that helps quality of life.
• Housing-related Items: Furnishings, appliances, and modifications for accessibility (though rent can sometimes reduce SSI payments—get attorney guidance).
• Transportation: Car payments, ride services, adaptive vehicles, bus passes.
• Recreation & Education: Tuition, hobby classes, books, tech devices, internet.
• Companion Services & Social Activities
• Pet Care: Often recognized as emotionally beneficial and a valid trust expense, especially when it contributes to the beneficiary’s health, safety, or emotional well-being. Documentation of its purpose is key.

Not allowed: Cash given directly to the beneficiary is counted as unearned income and can reduce or eliminate SSI benefits. Even small amounts can have big consequences—always consult a benefits specialist first.

The Essential Trustee Checklist

1. Document Everything: Keep thorough records tying each expense to the beneficiary’s well-being—and how it supplements, not duplicates, public benefits.
2. Pay Providers Directly: Avoid giving cash to the beneficiary; instead, pay vendors, service providers, or institutions on their behalf.
3. Maintain Detailed Accounting: Keep ledgers, receipts, and memos showing the purpose of each trust distribution and how it supplements—rather than replaces—public benefits.
4. Review Benefits Interactions: Trust distributions can sometimes reduce benefits; always check with an attorney or benefits expert before big purchases.
5. Get Trained & Supported: Trustees should attend special needs administration trainings or work with a lawyer familiar with SNT nuance in California.
6. Avoid Reimbursements to the Beneficiary: Reimbursing the beneficiary—even for valid out-of-pocket costs—can be counted as income and reduce SSI. Always seek legal guidance before doing this.

FAQs for California Families

Q: Isn’t a Special Needs Trust only about “extra” things, not basics?A: Not anymore! California courts and advocates confirm SNTs can cover everything that improves the beneficiary’s quality of life—so long as it supplements rather than replaces public support.Q: What kinds of trusts are available?A: There are first-party (funded with the beneficiary’s own assets, like inheritance or injury settlement) and third-party (funded by family or friends). Each has different rules, especially about payback to the state after the beneficiary passes. First-party SNTs (under 42 U.S.C. § 1396p(d)(4)(A)) require a Medicaid payback clause; third-party SNTs do not.Q: Can the trust pay for family trips, vacations, or big purchases?A: Often yes, but it’s situation-specific and must be well documented. Always check how large gifts or out-of-state expenditures impact benefits. Always check how large gifts or out-of-state expenditures impact benefits. These purchases should be clearly tied to the beneficiary’s well-being and must not leave them with assets that exceed program limits.Q: I’m a trustee—what if I make a mistake?A: Honest mistakes aren’t the end of the world, but penalties can be steep if rules are ignored. When in doubt, consult a qualified attorney or reach out for professional help.Q: Are there SNT tips or resources?A: Yes! See our guide and checklists here.

Benefit Protection Strategies: Practical Steps for California Families

1. Start with the Right Trust Structure

• Use qualified California attorneys to draft or review your trust.
• Specify that the trust is for supplemental, not basic, support—and reference current benefit protection laws and recent court guidance.

2. Train and Support Trustees

• Don’t hand over the job and hope for the best. Trustees benefit from education—especially if they’re family members.
• Provide them with easy-to-follow checklists and a hotline to your special needs attorney.

3. Keep up with Law Changes

• The rules shift. New laws like AB 2397, court decisions like McGee, and federal updates all impact your trust.
• Periodically review your trust with an attorney (we recommend every 2–3 years).

4. Coordinate Benefits and Reporting

• Trustees should be in contact with public benefit agencies and keep up-to-date on reporting requirements.
• Use direct payment to providers as much as possible to avoid income/support missteps.

Want a Deeper Dive?

• Download our free Special Needs Freedom Guide
• Watch an on-demand webinar for families and professionals
• Have a specific question? Book a call here.

Final Thoughts

California law is making it easier for families to create—and use—Special Needs Trusts without putting critical benefits at risk. The goal is always to empower your loved one to live with dignity, opportunity, and joy. By staying updated and getting the right guidance, you can make sure your special needs planning is solid, supportive, and totally compliant.We’re here to help every step of the way. Resources and support are available in English and Chinese—just reach out if you need a compassionate, expert ally on your side.