Planning for a special needs child's financial future requires careful consideration to ensure they receive the necessary care and support without jeopardizing their eligibility for government benefits. Simply leaving money in a will or as a direct gift can create problems, including disqualification from vital assistance programs like Supplemental Security Income (SSI) and Medicaid. The best solution is often a Special Needs Trust (SNT)-a legal arrangement designed to manage funds for a beneficiary with special needs while preserving their access to essential benefits.
If you need help setting up a Special Needs Trust, contact us by using our online form or calling 414-253-8500 to speak with an attorney.
Understanding Special Needs Trusts
A Special Needs Trust (SNT) is a legal tool that allows assets to be held and managed for a person with disabilities without interfering with their eligibility for government benefits. The funds in the trust can be used to improve the beneficiary's quality of life by covering expenses that government programs do not pay for, such as:
- Housing and utilities
- Education and vocational training
- Personal care attendants
- Medical and dental expenses not covered by insurance
- Travel, entertainment, and recreation
The key to an SNT is that the funds are not owned by the beneficiary but are instead managed by a trustee, who disburses money according to the trust's terms. Because the beneficiary does not directly control the assets, they do not count as personal resources when determining eligibility for means-tested programs like SSI and Medicaid.
Types of Special Needs Trusts
There are three main types of Special Needs Trusts:
1. First-Party Special Needs Trust (Self-Settled Trust)
This type of trust is funded with the beneficiary's own money, often from an inheritance, personal injury settlement, or back pay from Social Security. A first-party SNT must be irrevocable and include a Medicaid payback provision, meaning any remaining funds in the trust must be used to reimburse Medicaid after the beneficiary's passing.
2. Third-Party Special Needs Trust
A third-party SNT is created and funded by someone other than the beneficiary, typically a parent or grandparent. Unlike a first-party trust, there is no Medicaid payback requirement, so any remaining funds can be distributed to other heirs upon the beneficiary's death. This makes it the preferred option for families planning ahead.
3. Pooled Special Needs Trust
A pooled SNT is managed by a nonprofit organization that combines multiple beneficiaries' funds into a single trust for investment purposes while maintaining separate accounts for each beneficiary. This type of trust is often used when there is no suitable individual to act as trustee. Some pooled trusts also require Medicaid reimbursement upon the beneficiary's passing.
Comparison of Special Needs Trust Types
This table highlights the differences between First-Party, Third-Party, and Pooled Special Needs Trusts to help families choose the best option.
| Feature | First-Party SNT | Third-Party SNT | Pooled SNT |
|---|---|---|---|
|
Who Funds It? |
Beneficiary (e.g., personal injury settlement, inheritance) |
Parents, grandparents, or other relatives |
Multiple individuals; managed by a nonprofit |
|
Medicaid Payback Required? |
Yes, after beneficiary's death |
No |
Yes, unless funds remain with the nonprofit |
|
Who Manages It? |
Trustee chosen by the beneficiary or court |
Family-appointed trustee or professional |
Nonprofit organization |
|
Best Used When |
Beneficiary already owns assets that need protection |
Family wants to provide for a special needs child |
No suitable individual trustee is available |
|
Flexibility |
Less flexible due to Medicaid payback |
Most flexible; can distribute to other heirs |
Moderate; governed by nonprofit policies |
Why You Should Avoid Leaving Money Directly to a Special Needs Child
If you leave money to a special needs child through a will or direct inheritance, it could disqualify them from government benefits. Here's why:
- SSI and Medicaid have strict asset limits-owning more than $2,000 in countable assets can cause a loss of benefits.
- A lump sum inheritance is considered income, which could immediately terminate eligibility.
- Managing funds can be difficult-a child with special needs may not be able to handle large sums of money on their own.
Instead, funding a Third-Party Special Needs Trust ensures that assets are managed properly while keeping the child eligible for essential benefits.
How to Fund a Special Needs Trust
A Special Needs Trust (SNT) can be funded in various ways, depending on the family's financial situation and long-term planning goals. Here are some of the most common funding methods:
1. Cash and Investments
Families can transfer cash, stocks, bonds, and other investments into a special needs trust. This allows the trustee to manage the funds for the beneficiary's benefit while maintaining their eligibility for government aid.
2. Life Insurance
A life insurance policy is a powerful tool for funding an SNT, ensuring financial security after the parents or primary caregivers pass away. Parents can name the trust as the beneficiary of their life insurance policy, rather than the child directly. A permanent life insurance policy, such as whole life or universal life insurance, is often a preferred option because it guarantees a payout.
3. Real Estate
Some families choose to place a home or other real estate into a special needs trust. This can provide stable housing for the child while ensuring that Medicaid does not count the property as a personal asset.
4. Retirement Accounts (IRA, 401(k), Pension Plans)
Naming a Special Needs Trust as the beneficiary of a retirement account can protect these assets from disqualifying the child from government assistance. However, this requires careful tax planning, as inherited retirement accounts are subject to required minimum distributions (RMDs) and potential income taxes.
5. Inheritance from Relatives
If extended family members (e.g., grandparents, aunts, uncles) wish to leave money to a special needs child, they should direct those assets into the Third-Party Special Needs Trust instead of giving the inheritance directly. This avoids asset limit issues and keeps the funds protected.
Choosing the Right Trustee for a Special Needs Trust
The trustee of an SNT is responsible for managing the funds, making distributions, and ensuring compliance with government regulations. Choosing the right trustee is crucial. Consider these options:
Family Member as Trustee
A family member may be a good choice if they:
- Understand the beneficiary's needs and lifestyle
- Are financially responsible and able to manage trust assets
- Are willing to follow strict legal and government rules for SNTs
However, this role can be overwhelming, and mistakes could jeopardize benefits.
Professional Trustee
Families may hire a professional trustee, such as a bank, trust company, or attorney, to manage the trust. This ensures:
- Expertise in trust administration and government benefit regulations
- Objective, professional management of assets
- Reduced risk of errors that could disqualify the child from benefits
Co-Trustee or Advisory Committee
Some families appoint both a family member and a professional trustee to balance personal insight with financial expertise. Others establish an advisory committee to provide guidance on the child's needs while the trustee handles financial matters.
Common Mistakes to Avoid in Special Needs Planning
When creating a financial plan for a child with special needs, it's important to avoid these common pitfalls:
1. Failing to Create a Special Needs Trust
Many families assume that leaving money to a relative or caregiver "for the benefit of" the child is a safe alternative. However, this can lead to unintended risks, such as:
- The caregiver using the funds for their own purposes
- The money being lost due to divorce, lawsuits, or creditors
- The child becoming ineligible for government aid
2. Naming the Child as a Direct Beneficiary
Leaving an inheritance directly to a special needs child-whether through a will, life insurance, or retirement account-can result in disqualification from government programs. Instead, assets should go into a Special Needs Trust.
3. Choosing the Wrong Trustee
Selecting an unqualified trustee can lead to poor financial management, benefit disqualification, or even legal trouble. Always choose someone with the knowledge and ability to administer the trust properly.
4. Neglecting to Fund the Trust Properly
A trust is only effective if it has sufficient assets. Families should work with an attorney and financial planner to determine how much is needed and identify the best funding sources.
5. Not Updating the Estate Plan
A child's needs and circumstances may change over time. Families should review their estate plan periodically and update the trust as needed to reflect:
- Changes in financial status
- New laws or regulations affecting special needs planning
- The addition of new assets or funding sources
Contact a Special Needs Planning Attorney
Setting up a Special Needs Trust requires careful legal and financial planning to ensure your child's future is protected. An experienced attorney can help you:
- Create the right type of trust based on your child's needs
- Choose a suitable trustee to manage assets responsibly
- Ensure the trust is properly funded to provide long-term financial security
- Navigate government benefit rules to avoid unintended disqualification
If you are considering a Special Needs Trust, we can help. Contact Heritage Law Office today by calling 414-253-8500 or filling 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) is designed to hold and manage assets for a person with disabilities without affecting their eligibility for government benefits like Supplemental Security Income (SSI) and Medicaid. It ensures that funds can be used for expenses not covered by these programs, such as housing, education, and personal care, while protecting the beneficiary's financial future.
2. Can a Special Needs Trust pay for housing and food?
While a Special Needs Trust can pay for housing and food, doing so may impact SSI benefits. The Social Security Administration (SSA) considers these expenses "in-kind support and maintenance," which can reduce the beneficiary's monthly SSI payment. However, the trustee can cover other non-essential expenses without affecting benefits.
3. Who can be the trustee of a Special Needs Trust?
A trustee can be:
- A family member, such as a parent or sibling
- A professional trustee, such as a bank or trust company
- A nonprofit organization, in the case of a pooled trust
- A combination of the above, where a family member and a professional trustee work together
The trustee should have financial management skills and an understanding of government benefit rules to avoid jeopardizing the beneficiary's eligibility.
4. Is a Special Needs Trust revocable or irrevocable?
Most Special Needs Trusts are irrevocable, meaning they cannot be changed or revoked once established. However, some third-party trusts may allow modifications if circumstances change. An estate planning attorney can help determine the best structure for your situation.
5. How much money should I put into a Special Needs Trust?
The amount depends on the child's anticipated lifetime needs, including housing, medical care, personal assistance, and education. Families often fund the trust with a combination of cash, life insurance, and retirement assets. Working with a financial planner and an attorney can help estimate an appropriate funding amount.