Planning for your child's future is a priority, especially if they have special needs that require lifelong care and financial stability. A Special Needs Trust (SNT) is a legal tool that allows parents, guardians, and loved ones to set aside funds for a child with disabilities without jeopardizing their eligibility for government benefits such as Supplemental Security Income (SSI) and Medicaid.
Setting up a Special Needs Trust requires careful planning to ensure that your child is financially protected while preserving their access to essential public assistance programs. Below, we outline the key steps in establishing an SNT, the benefits it provides, and common mistakes to avoid.
If you need legal assistance in setting up a Special Needs Trust, contact us by using our online form or calling 414-253-8500.
What Is a Special Needs Trust?
A Special Needs Trust is a type of trust designed to hold assets for a person with disabilities while allowing them to remain eligible for means-tested government benefits like SSI and Medicaid. These trusts ensure that funds are available for supplemental expenses-such as housing, transportation, medical care not covered by Medicaid, and recreational activities-without directly giving the beneficiary money that could disqualify them from public aid.
There are two main types of Special Needs Trusts:
- First-Party Special Needs Trust - Funded with the disabled individual's own assets, such as an inheritance or lawsuit settlement. Must include a Medicaid payback provision.
- Third-Party Special Needs Trust - Created and funded by parents, grandparents, or other loved ones. This type of trust does not require Medicaid payback after the beneficiary's death.
Benefits of a Special Needs Trust
- Preserves Government Benefits - Ensures that assets do not disqualify the child from Medicaid or SSI.
- Provides Long-Term Financial Security - Allows parents to set aside funds for future care.
- Control Over Asset Distribution - A designated trustee manages funds, ensuring they are used appropriately.
- Flexible Use of Funds - Can be used for expenses that improve quality of life, such as education, therapies, personal care, and travel.
Types of Special Needs Trusts and Their Key Differences
| Type of Special Needs Trust | Who Funds It? | Medicaid Payback Required? | Best For |
|---|---|---|---|
|
First-Party Special Needs Trust |
The beneficiary (e.g., from an inheritance or lawsuit settlement) |
Yes - Medicaid must be repaid upon the beneficiary's death |
Individuals who receive a large sum of money and need to protect their benefits |
|
Third-Party Special Needs Trust |
Parents, grandparents, or other relatives |
No - Assets can be distributed to other heirs |
Families who want to leave assets for a child with disabilities without affecting benefits |
|
Pooled Special Needs Trust |
A nonprofit organization |
Yes - Medicaid payback may be required |
Beneficiaries with small assets who need professional trust management |
Steps to Set Up a Special Needs Trust
1. Determine the Type of Special Needs Trust
Decide whether a First-Party or Third-Party SNT is appropriate based on who is funding the trust. A third-party trust is most common when planning for a child's future.
2. Choose a Trustee
Select a trustee to manage the trust funds. The trustee should be someone trustworthy and capable of handling finances. Options include:
- Family members (parent, sibling, or relative)
- Professional trustees (attorney, bank, or trust company)
- Nonprofit organizations (pooled trusts for beneficiaries with small assets)
3. Draft the Trust Document
Work with an experienced estate planning attorney to draft a Special Needs Trust agreement that complies with state and federal laws. The document should include:
- The purpose of the trust
- The trustee's responsibilities
- How funds can be used
- A successor trustee designation
4. Fund the Trust
A Special Needs Trust can be funded with various assets, including:
- Cash savings
- Stocks, bonds, or investments
- Life insurance policies (naming the trust as the beneficiary)
- Real estate (homes or rental properties)
- Gifts and inheritances from family members
5. Ensure Proper Beneficiary Designations
If you plan to leave assets to the trust through wills, retirement accounts, or life insurance, update your beneficiary designations to name the Special Needs Trust instead of your child directly. This prevents disqualification from government benefits.
6. Comply with Legal and Tax Requirements
A Special Needs Trust has specific tax implications. The trustee may need to file annual tax returns for the trust, depending on its income. Consult with an estate planning attorney and tax professional to ensure compliance.
7. Review and Update the Trust Regularly
Circumstances change, so it's important to review the trust periodically to:
- Adjust funding sources
- Change trustees if needed
- Ensure compliance with evolving laws
Common Mistakes to Avoid When Setting Up a Special Needs Trust
While a Special Needs Trust is a powerful tool for securing your child's future, improper setup or management can lead to unintended consequences. Below are some common mistakes to avoid:
1. Naming the Child as a Direct Beneficiary of Assets
One of the biggest mistakes parents make is leaving an inheritance, life insurance proceeds, or other assets directly to their child with disabilities. This could disqualify them from Medicaid, Supplemental Security Income (SSI), and other means-tested benefits. Instead, these assets should be directed to the Special Needs Trust.
2. Choosing the Wrong Trustee
A trustee plays a crucial role in managing the trust assets and making financial decisions on behalf of the beneficiary. Common mistakes include:
- Selecting an unqualified family member who lacks experience in handling finances.
- Choosing someone who may have conflicts of interest.
- Failing to name a backup trustee in case the original trustee cannot serve.
If managing the trust is too complex, consider hiring a professional trustee such as a bank, financial institution, or special needs planning attorney.
3. Not Properly Funding the Trust
Simply creating a Special Needs Trust is not enough; it must be properly funded. Mistakes include:
- Failing to transfer assets into the trust.
- Forgetting to update beneficiary designations on life insurance policies and retirement accounts.
- Not planning for additional sources of funding, such as gifts from relatives or future inheritances.
4. Making Direct Payments to the Beneficiary
Trustees should never give cash directly to the beneficiary, as this could count as income and reduce their eligibility for government benefits. Instead, the trustee should use the trust to pay for services and expenses directly to providers, such as:
- Housing costs (when structured properly)
- Medical treatments not covered by Medicaid
- Educational expenses and recreational activities
5. Failing to Keep the Trust Up to Date
Laws and financial situations change over time, so it's essential to review the trust regularly and update it as needed. Changes in Medicaid regulations, tax laws, or family circumstances could impact how the trust should be structured.
How a Special Needs Trust Protects Government Benefits
A key advantage of a Special Needs Trust is that it preserves the beneficiary's eligibility for SSI, Medicaid, and other public assistance programs. Here's how it works:
| Benefit | Eligibility Requirement | How the Trust Protects It |
|---|---|---|
|
SSI (Supplemental Security Income) |
Cannot have more than $2,000 in personal assets |
Assets in a properly structured SNT do not count toward this limit |
|
Medicaid |
Strict income and asset limits |
The trust allows funds to be used for care without affecting eligibility |
|
Section 8 Housing |
Income-based eligibility |
The trust ensures extra funds do not count as income |
By placing assets in a Special Needs Trust, parents can ensure their child remains eligible for essential government benefits while still having financial resources available for supplementary needs.
When Should You Set Up a Special Needs Trust?
The best time to establish a Special Needs Trust is as soon as possible. Even if your child is young, setting up the trust early ensures:
- Future inheritances from relatives won't disqualify them from benefits.
- Life insurance or estate assets can be directed into the trust.
- Proper planning is in place for long-term care and financial management.
Additionally, if your child is approaching adulthood (age 18), having an established trust ensures a smooth transition into financial independence while keeping government aid intact.
Funding a Special Needs Trust: What Can and Cannot Be Paid For?
A Special Needs Trust should only be used for expenses that enhance the quality of life of the beneficiary without replacing government benefits.
| Allowed Expenses | Prohibited Expenses |
|---|---|
|
Medical expenses not covered by Medicaid |
Direct cash payments to the beneficiary |
|
Transportation (vehicle purchase, Uber, Lyft) |
Food and groceries (if on SSI) |
|
Personal care attendants |
Rent or mortgage (unless structured correctly) |
|
Education, therapy, and training programs |
Utilities (if on SSI) |
|
Recreational activities, vacations, and entertainment |
Anything that violates Medicaid or SSI rules |
To avoid problems, trustees should consult with a special needs attorney before making major distributions from the trust.
Contact an Attorney for Special Needs Trusts
Setting up a Special Needs Trust requires careful planning to ensure that your child receives the necessary financial protection without losing access to government benefits. An experienced estate planning attorney can guide you through the process, ensuring compliance with state and federal laws.
At Heritage Law Office, we help families create effective Special Needs Trusts tailored to their loved one's unique needs. Contact us today at 414-253-8500 or fill out our online form to schedule a consultation.
Frequently Asked Questions (FAQs)
1. What is the purpose of a Special Needs Trust?
A Special Needs Trust (SNT) allows parents or guardians to set aside funds for a child with disabilities without affecting their eligibility for government benefits like Medicaid or Supplemental Security Income (SSI). The trust provides financial support for expenses beyond basic needs, such as education, therapy, and recreation.
2. Can a Special Needs Trust be changed or revoked?
It depends on the type of trust. A Revocable Special Needs Trust can be modified or revoked by the grantor, whereas an Irrevocable Special Needs Trust cannot be changed once it is established. Most third-party SNTs are irrevocable to ensure long-term protection for the beneficiary.
3. Who can be a trustee of a Special Needs Trust?
A trustee can be:
- A family member, such as a parent or sibling
- A professional trustee, like an attorney or bank
- A nonprofit organization, which manages pooled trusts for multiple beneficiaries
Choosing the right trustee is crucial to ensure funds are managed properly and in compliance with government regulations.
4. How does a Special Needs Trust protect Medicaid and SSI eligibility?
A properly structured Special Needs Trust ensures that trust assets do not count toward the beneficiary's personal financial limits for government assistance programs. Instead of receiving direct cash payments, the beneficiary gets financial support through trust-managed disbursements for approved expenses.
5. What happens to the trust funds when the beneficiary passes away?
For a First-Party Special Needs Trust, any remaining funds must be used to repay Medicaid costs before being distributed to heirs. In contrast, a Third-Party Special Needs Trust does not require Medicaid repayment, and any remaining assets can be left to other family members or charitable organizations.