Can We Decant into a Special Needs Trust

I recently spoke with Emily, a woman frantic about her brother David. David, who has Down syndrome, will inherit a substantial sum upon their mother’s passing. Emily’s fear wasn’t about David mismanaging the funds directly—it was the impact on his critical government benefits. A direct inheritance, even if carefully managed, could disqualify him from Supplemental Security Income (SSI) and Medi-Cal, leaving him far worse off financially than before. The cost of losing those benefits would easily exceed the value of any inheritance. She’d heard about “decanting” trusts, but wasn’t sure if it was even possible in her situation.

For over 35 years, I’ve been helping families navigate these complex estate planning scenarios, combining my legal expertise with my CPA credentials to offer a uniquely comprehensive approach. As a CPA, I understand the interplay between trust distributions, the step-up in basis of assets, capital gains tax implications, and—crucially—the preservation of government benefits for beneficiaries with special needs. It’s not just about avoiding probate; it’s about ensuring long-term financial security and quality of life.

What Exactly Does “Decanting” a Trust Mean?

Decanting, in the trust context, is essentially transferring assets from one trust (the original trust) into a new trust (the decanted trust) while attempting to preserve the original intentions of the grantor. It’s like pouring wine from an old bottle into a new one, hence the term. This can be incredibly useful when circumstances change – like a beneficiary developing a disability after the trust was originally created, or when a trust’s terms become outdated or inefficient. However, decanting isn’t a simple process, and California has specific rules governing when and how it can be done.

Is Decanting into a Special Needs Trust (SNT) Permitted in California?

Yes, decanting into a properly drafted Special Needs Trust is a viable strategy, but it’s fraught with potential pitfalls. The key is complying with California’s decanting statutes and ensuring the decanting doesn’t violate the terms of the original trust or create unintended tax consequences. The most relevant statute is Probate Code § 13100, which outlines the conditions for decanting.

What Are the Requirements for a Valid Decant to an SNT?

Several conditions must be met:

• Trust Terms: The original trust must not specifically prohibit decanting. Most modern trusts include a decanting provision, but older trusts may not.
• Beneficiary Consent: Generally, all beneficiaries of the original trust must consent to the decanting, unless the decanting is solely for the benefit of a single beneficiary and doesn’t negatively impact others. This can be a major hurdle if there are multiple beneficiaries with conflicting interests.
• Material Purpose: There must be a “material purpose” for the decanting. In Emily’s case, preserving David’s eligibility for SSI and Medi-Cal is a perfectly valid material purpose.
• Trust Protector or Court Approval: Decanting typically requires either the consent of a trust protector (if the trust document grants them this authority) or a court order. Seeking court approval offers the greatest protection against future challenges.

What Happens If We Don’t Decant Properly?

Failure to comply with California’s decanting laws can have devastating consequences. The decanting could be deemed invalid, potentially triggering immediate acceleration of the trust, exposing assets to creditors, or—worse—disqualifying David from essential benefits. A badly planned decant could also create a taxable event, negating the benefits of preserving the inheritance.

Why a CPA-Attorney is Crucial in These Cases

This is where my dual expertise as an Estate Planning Attorney and a CPA becomes invaluable. Decanting into an SNT isn’t just a legal maneuver; it’s a tax and benefits planning exercise. We need to carefully consider the basis of the assets being decanted – what was the original cost? The step-up in basis on inherited assets can significantly reduce capital gains taxes when those assets are eventually sold. However, decanting could potentially disrupt that step-up, so meticulous planning is essential. Furthermore, understanding the interaction between trust distributions and eligibility for needs-based government programs like SSI and Medi-Cal is paramount.

What About the New AB 2016 Law and “Missing” Assets?

It’s important to note that in situations where assets weren’t properly titled in the trust, and the death occurs on or after April 1, 2025, AB 2016 (Probate Code § 13151) provides a streamlined pathway – a ‘Petition’ for transferring assets to the SNT for lower-value homes (under $750,000). This is often faster and less expensive than a full Heggstad Petition, which involves a complex probate court trial. It’s crucial to understand the difference between these two procedures, and we’d carefully assess which is more appropriate for your situation.

Protecting David – and Ensuring Your Peace of Mind

Emily’s situation is not uncommon. Many families find themselves facing unexpected challenges after a trust is established. Decanting into a Special Needs Trust can be a powerful tool for protecting vulnerable beneficiaries, but it requires careful planning and expert guidance. Don’t risk jeopardizing David’s future by attempting this on your own. Let me help you navigate the complexities and ensure a secure future for him.

What failures trigger court intervention and contests in California trust administration?

Success in trust administration depends on more than just the document; it requires active management of assets, precise accounting to beneficiaries, and careful navigation of tax rules. Whether dealing with a blended family or complex real estate, understanding the mechanics of trust law is the only way to ensure the grantor’s wishes survive scrutiny.

• Protection: Review asset privacy options.
• Detail: Check probate-trust hybrids.
• Wealth: Manage long-term trust assets.

Ultimately, the success of a trust depends on the details—proper funding, clear terms, and a trustee willing to follow the rules. By anticipating friction points and documenting every step of the administration, fiduciaries can protect the estate and themselves from liability.

Verified Authority on California Trust Litigation & Disputes

• The 120-Day Rule (Probate Code § 16061.7): California Probate Code § 16061.7
  The most critical statute in trust litigation. It establishes the 120-day deadline for contesting a trust after the notification is mailed. Missing this deadline usually ends the case before it starts.
• Caregiver Presumption (Probate Code § 21380): California Probate Code § 21380
  This statute protects seniors by presuming that gifts to care custodians are the result of fraud or undue influence. It is the primary weapon used to overturn “deathbed amendments” that favor a caregiver over family.
• No-Contest Clauses (Probate Code § 21311): California Probate Code § 21311
  Defines the strict limits on enforcing penalty clauses. It explains that a beneficiary can only be disinherited for suing if they lacked “probable cause” to bring the lawsuit.
• Petition for Instructions (Probate Code § 17200): California Probate Code § 17200
  The “gateway” statute for most trust litigation. It allows a trustee or beneficiary to petition the court for instructions regarding the internal affairs of the trust, from interpreting terms to removing a trustee.
• Asset Recovery “Backup” (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute provides a streamlined path (Judge’s Order) to resolve disputes over ownership of a primary residence valued up to $750,000, often avoiding costly Heggstad litigation.
• Digital Discovery (RUFADAA): California Probate Code § 870 (RUFADAA)
  Essential for modern litigation. This act governs who can access a decedent’s digital communications—often the “smoking gun” evidence in undue influence or capacity trials.