Are you in the midst of financial planning with your child's needs in mind? This guide walks you through setting up a special needs trust. If you have a child or family member with special needs, you want to ensure a plan is in place for their future. Setting up a trust is just one piece of a comprehensive special needs financial plan.
For many families, helping a disabled loved one thrive is a difficult undertaking with considerable worry. The peace of mind that comes from knowing your loved one will have access to necessary resources is invaluable. Let's walk you through the process.
What is a Special Needs Trust?
Before discussing how to set up a special needs trust, we need to clarify what we mean by the term. A special needs trust is a legal arrangement that allows someone with physical disabilities, mental disabilities, or chronic disabling illness to receive financial support without reducing their eligibility for Social Security, Supplemental Security Income (SSI), Medicare, or Medicaid.
How Does It Work?
The distinction is critical. If the trust is set up incorrectly or used to pay for the wrong things, it can disqualify the beneficiary from government support that may be crucial to their ongoing medical care.
A special needs trust is not a gift of money or assets to the beneficiary to support them after you die. That sounds counterintuitive until you understand the mechanism: owning assets like a car, furnishings, or personal effects does not disqualify someone from receiving SSI benefits, but cash in the bank does.
You're not leaving money or assets to your loved one—you're leaving it to the trust, of which your loved one is a beneficiary.
What Can It Pay For?
Determining what the trust can pay for is complicated, because you must ensure it won't affect SSI, Medicaid, and Medicare eligibility. In general, noncountable assets are acceptable as part of a special needs trust:
- One home (value depends on the type of disability benefits)
- Home furnishings
- Personal effects
- One motor vehicle, regardless of the value
- Essential property for self-support
- Life insurance policies
- Burial policies
These items come with stipulations, particularly for homeownership. A home of any value may generally be bequeathed to a trust. However, if your loved one receives only Medicaid, the home value may not exceed $500,000 or $750,000.
The trust also has limits on what it cannot pay for. It cannot pay for countable assets, which include:
- Checking and savings accounts
- Cash
- Any real estate that is not the beneficiary's primary residence
- Retirement assets including 401(k)s and IRAs
- Investment accounts
- Stocks and bonds
Money left to the trust can be used in several ways. The most common include personal care attendants, out-of-pocket medical and dental expenses, physical rehabilitation, and education. As a rule, it cannot be used for rent, mortgage payments, food, groceries, and property taxes—though you should consult with your attorney on the specific details.
What are the Benefits?
The key benefit of special needs trusts is that they allow your loved one to receive support without disqualifying them from government disability assistance. Many people believe leaving money to a disabled loved one in their will is helpful, but it's actually one of the biggest financial planning mistakes in special needs planning.
The solution often lies in naming a trustee to manage the trust on behalf of the beneficiary, ensuring compliance with government benefit rules.
Who Can Benefit from a Special Needs Trust?
A special needs trust can serve a variety of people—from someone with Down syndrome to someone with a physical disability who manages their own finances. The right structure depends entirely on the beneficiary's situation.
Someone with Permanent Special Needs
Someone with permanent special needs is the most obvious candidate. This refers to someone who will need government disability assistance for their entire life because of a permanent or severe disabling condition.
Not all individuals with a disability qualify for government benefits. Common examples include those who are blind, have Down syndrome, chronic severe mental illness preventing work, paralysis, or congenital conditions like cystic fibrosis or cerebral palsy.
Someone Eligible for Medicare or SSDI
Not all Medicare or Social Security Disability Insurance (SSDI) recipients need a special needs trust. These programs don't base eligibility on available assets or income.
However, a special needs trust may help supplement your loved one's income if their Medicare or SSDI payment is low. A common example is long-term nursing home care.
Someone Who May Need Benefits Later
This category refers to someone with a condition that could worsen over time. They may currently be able to work, but their condition might prevent them from doing so in the future.
Setting up a trust now provides future security—even if it turns out they never need to use it.
Someone Who May Not Need Benefits Later
You may want a special needs trust for someone who may never need benefits. This requires some guesswork: you can't predict how someone's condition will evolve or what treatments may become available.
Most special needs trusts are designed with flexibility—they grant the trustee the power to terminate the trust if it's no longer in the beneficiary's best interests.
Someone Who Cannot Manage Finances Independently
Trusts for someone who cannot manage finances independently are often called spendthrift trusts. These serve individuals who have some independence but cannot manage their finances due to disability—including autism spectrum disorders or mental illnesses like bipolar disorder.
A special needs trust also protects your loved one from those who might exploit someone with a disability they perceive as having money.
How to Set Up a Special Needs Trust
Setting up a special needs trust is a complicated process. While you can do it independently, bringing in expert help ensures it's structured correctly. Understanding the legal considerations in special needs planning provides important context for how your trust fits into the broader framework.
1. Get Familiar with the Types of Special Needs Trusts
There are three main types of special needs trust:
- First-party special needs trust
- Third-party special needs trust
- Pooled trust
First-party trust. For someone with their own assets or expecting to receive assets that would disqualify them from benefits. The beneficiary's own assets fund the trust.
Third-party trust. Set up by a donor (usually a parent or relative) who contributes funds as part of their estate plan. The beneficiary can receive gifts while the donor lives, and assets pass to the donor's other relatives upon the beneficiary's death.
Pooled trust. Created by a nonprofit organization, with individuals setting up accounts within the larger pool. Assets are pooled and invested collectively, but each beneficiary's account remains separate. This allows families to create a special needs account without the high cost of an individual trust.
2. Get in Touch with a Lawyer or Specialized Financial Planner
You can theoretically set up a trust yourself, but it's unwise. The entire goal is to provide support beyond government benefits, which requires meeting both state and federal standards.
A misstep could leave your loved one in a worse situation than having no trust at all. A specialized financial planner and attorney can guide you through the process and advise on the right trust type and trustee selection.
3. Initiating the Trust
Once you have professionals in place, you'll create a trust document, sometimes called a trust instrument. This outlines the rights, duties, and authority of all parties.
You'll name a trustee in this document. Choosing the right trustee is critical—see our guide on how to choose a trustee for a special needs trust for detailed guidance on this decision. It's common for parents to serve as trustees and name a successor. Once notarized, the trust takes effect and you'll receive an identification number from the IRS.
You can then create an initial deposit by opening a bank account with a minimum deposit.
4. Funding a Special Needs Trust
The trust is then ready to be funded through estate planning tools—wills, living trusts, and beneficiary designations. Anyone except the beneficiary can contribute, including non-family members.
Virtually any property can be held in the trust: real estate, stocks, jewelry, or assets left through a will or beneficiary designation. The primary goal is raising cash for expenses not covered by SSI or Medicare. Life insurance is a common mechanism for funding special needs trusts, particularly when parents want to ensure resources are available after their death.
The trustee often has authority to sell tangible items like cars, jewelry, or property to meet beneficiary needs. Choose a trustee with solid knowledge of basic investment principles and the beneficiary's needs.
Financial Planning for Special Needs
Setting up a special needs trust is complicated, and you shouldn't do it alone. Many families with special needs children lack proper guidance on financial matters.
If you'd like to discuss special needs trust planning for your family, start a conversation with us.
