Setting Up a Trust So That a Child With Down Syndrome Inherits Without Losing Benefits

Providing for a child with Down syndrome requires careful planning to ensure they receive financial support without jeopardizing vital government benefits like Supplemental Security Income (SSI) and Medicaid. A well-structured trust can help secure their future while preserving these essential benefits.

A Special Needs Trust (SNT) is one of the best tools available to protect assets intended for a child with Down syndrome. It allows funds to be used for their benefit while maintaining eligibility for government assistance. This article explains how to set up a trust correctly, the types of trusts available, and the key legal considerations.

If you need assistance setting up a trust, contact us by using the online form or calling 414-253-8500 for legal guidance.

Why a Special Needs Trust (SNT) Is Necessary

Many government benefit programs, such as SSI and Medicaid, have strict income and asset limits. If a child with Down syndrome directly inherits money or property, they may exceed these limits and lose access to crucial benefits.

A Special Needs Trust (SNT) prevents this issue by:

• Holding the assets on behalf of the child without making them legally "own" the assets.
• Providing supplemental support while keeping government benefits intact.
• Ensuring responsible management of funds through a trustee.

Types of Special Needs Trusts

When setting up a trust for a child with Down syndrome, you can choose between two primary types:

1. First-Party Special Needs Trust

• Funded with the child's own assets (e.g., inheritance, lawsuit settlement).
• Required to include a Medicaid payback provision, meaning any remaining funds after the child's passing must be used to repay Medicaid.
• Best for situations where the child receives assets in their name.

2. Third-Party Special Needs Trust

• Funded with assets from parents, relatives, or other third parties.
• No Medicaid payback requirement, so any remaining funds can be passed to other family members.
• The preferred option for parents looking to provide long-term support.

3. Pooled Special Needs Trust

• Managed by a nonprofit organization.
• Combines multiple beneficiaries' funds for professional investment management.
• Suitable for families who may not have a designated trustee available.

Each type of trust has its advantages, and selecting the right one depends on your specific financial situation.

Comparison of First-Party vs. Third-Party Special Needs Trusts

Feature	First-Party Special Needs Trust	Third-Party Special Needs Trust
Who Funds the Trust?	The individual with disabilities (e.g., from an inheritance, lawsuit settlement).	Parents, grandparents, or other family members.
Impact on Benefits	Preserves eligibility for SSI and Medicaid.	Preserves eligibility for SSI and Medicaid.
Medicaid Payback Requirement	Yes, remaining assets must be used to reimburse Medicaid upon the beneficiary's death.	No, remaining assets can be passed to other heirs.
Best Use Case	When a child with Down syndrome directly receives assets in their name.	When parents or relatives plan to provide financial support.

Key Steps to Establishing a Special Needs Trust

To properly set up a Special Needs Trust for a child with Down syndrome, follow these essential steps:

1. Choose the Right Type of Trust - Determine whether a first-party, third-party, or pooled trust best fits your needs.
2. Select a Trustee - Appoint a responsible individual, professional trustee, or nonprofit organization to manage the trust.
3. Draft a Legally Sound Trust Document - Work with an experienced estate planning attorney to ensure the trust complies with federal and state laws.
4. Fund the Trust - Transfer assets, including cash, real estate, investments, or life insurance policies, into the trust.
5. Outline Allowable Expenses - Define how trust funds can be used to enhance the child's quality of life, such as:
   • Medical and dental care not covered by Medicaid
   • Educational programs and tutoring
   • Assistive technology and specialized equipment
   • Recreational activities and travel

Common Mistakes to Avoid When Setting Up a Special Needs Trust

While a Special Needs Trust (SNT) is a powerful tool, errors in planning or execution can compromise its effectiveness. Here are some of the most common mistakes to avoid:

1. Naming the Child as the Direct Beneficiary of an Inheritance

If a child with Down syndrome is named as a direct beneficiary of a will, life insurance policy, or retirement account, they may become ineligible for government benefits. Instead, these assets should be directed into a properly drafted Third-Party Special Needs Trust.

2. Failing to Properly Fund the Trust

A trust must be adequately funded to serve its intended purpose. This means ensuring that:

• Beneficiary designations on life insurance policies or retirement accounts name the trust, not the child.
• Family members contributing to the child's future are aware of the trust's existence.
• Assets are correctly titled in the trust's name.

3. Choosing the Wrong Trustee

The trustee is responsible for managing the trust and making financial decisions in the child's best interest. Poor trustee selection can lead to financial mismanagement, legal issues, or even loss of government benefits. Consider these options:

• A trusted family member or friend who understands the child's needs.
• A professional trustee (e.g., a financial institution or attorney) with experience in managing special needs trusts.
• A corporate trustee or nonprofit organization that specializes in SNT administration.

4. Allowing the Beneficiary to Have Direct Control Over the Trust

If a child with Down syndrome is given direct access to the trust funds, it could disqualify them from SSI or Medicaid. The trustee should manage all distributions to ensure the funds are used appropriately while maintaining benefits eligibility.

5. Not Keeping the Trust Updated

A Special Needs Trust should be reviewed regularly to accommodate changes in laws, family circumstances, or the child's evolving needs. Periodic updates can help ensure the trust remains legally sound and effective.

Funding a Special Needs Trust: What Assets Can Be Used?

A Special Needs Trust can hold a variety of assets to support a child with Down syndrome without affecting their benefits. These may include:

• Cash & Investments - Savings accounts, stocks, bonds, and mutual funds.
• Real Estate - A home or property can be placed in the trust for the child's residence.
• Life Insurance Proceeds - Parents can designate the trust as a beneficiary of their life insurance policy.
• Retirement Accounts - IRAs and 401(k)s can be directed to the trust, though tax implications should be considered.
• Personal Property - Vehicles, jewelry, collectibles, or valuable assets can be held in the trust.

It is important to consult with an estate planning attorney to determine the most tax-efficient and strategic way to fund the trust.

The Role of the Trustee in Managing the Trust

The trustee plays a crucial role in ensuring the child's long-term financial security. Their primary responsibilities include:

• Managing trust assets to ensure steady growth and preservation.
• Making appropriate distributions for expenses such as medical care, therapy, education, and recreational activities.
• Maintaining government benefit eligibility by following legal guidelines for disbursements.
• Keeping accurate records of trust transactions and annual tax filings.

Because the role of a trustee can be complex, some families opt for a co-trustee arrangement, where a family member works alongside a professional trustee.

How a Special Needs Trust Preserves Government Benefits

A well-structured Special Needs Trust ensures that inherited assets do not count toward the child's financial eligibility for benefits. Here's how it works:

• SSI & Medicaid Asset Limits - These programs limit assets to $2,000 for an individual. However, funds held in an SNT are not counted toward this limit.
• Controlled Disbursements - Trust funds cannot be given directly to the beneficiary. Instead, they must be used to pay for services or items that supplement government benefits.
• Approved Expenses - Funds from the trust can be used for:
  • Medical treatments not covered by Medicaid.
  • Educational programs and vocational training.
  • Travel, recreation, and hobbies.
  • Assistive technology and home modifications.

By structuring the trust correctly, the child can continue to receive SSI, Medicaid, and other state and federal benefits while enjoying financial security.

Contact an Attorney for Special Needs Trust Planning

Setting up a Special Needs Trust requires careful legal drafting and financial planning to ensure your child's long-term well-being. A properly structured trust can provide financial security while preserving access to essential government benefits.

At Heritage Law Office, we help families navigate the complexities of estate planning for children with disabilities. Whether you need assistance creating a trust, selecting a trustee, or funding the trust, we are here to guide you.

📞 Call us today at 414-253-8500 or use our online contact form to schedule a consultation.

Frequently Asked Questions (FAQs)

1. What is the best type of trust for a child with Down syndrome?

A Third-Party Special Needs Trust is often the best option for parents planning to leave an inheritance for a child with Down syndrome. This type of trust protects the child's eligibility for government benefits while allowing family members to contribute funds without Medicaid payback requirements.

2. Can a child with Down syndrome inherit money without losing SSI and Medicaid?

Yes, but only if the inheritance is placed in a properly structured Special Needs Trust (SNT). If a child directly inherits money or property, they may exceed asset limits and lose benefits. A Special Needs Trust ensures funds are managed on their behalf while maintaining eligibility for programs like SSI and Medicaid.

3. Who should be the trustee of a Special Needs Trust?

The trustee should be someone responsible and knowledgeable about managing trust assets and government benefit rules. Options include:

• A family member who understands the child's needs.
• A professional trustee, such as a financial institution or attorney.
• A nonprofit organization specializing in Special Needs Trusts.

4. What expenses can a Special Needs Trust pay for?

A Special Needs Trust can cover supplemental expenses that improve the child's quality of life, such as:

• Medical treatments not covered by Medicaid.
• Therapy, education, and vocational training.
• Assistive technology and specialized equipment.
• Travel, recreation, and entertainment.
• Home modifications and personal care.

5. Can an ABLE account replace a Special Needs Trust?

No, an ABLE account is a useful supplement but not a replacement for a Special Needs Trust. While ABLE accounts allow individuals with disabilities to save up to $100,000 without losing SSI, they have limitations on contributions and qualifying expenses. A Special Needs Trust offers greater flexibility and can hold unlimited funds without affecting benefits.