Special Needs Trust: Here’s All You Need to Know 

By Rafael Magaña 

When you have a loved one with special needs (a disability or chronic illness), planning for them becomes the right thing to do. You want to protect them at all costs and ensure they have all they need even when you are no more.   

But get this – if you plan to leave money or assets for a loved one with special needs, you will need to do this carefully. Otherwise, you can disqualify them from being eligible to receive government assistance and benefits.  

Let’s explain this. Leaving your loved ones with cash can disqualify them from being eligible to receive benefits from the government. For example, leaving a loved one $15,000 in cash can disqualify them from getting government benefits like Medicaid, Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), etc. This is where the Special Needs Trust has an advantage.  

A Special Needs Trust is an estate planning tool that allows a person with special needs (disabilities or chronic illnesses) to receive funds without being disqualified from receiving government benefits.  

Typically, parents can set up a Special Needs Trust for their disabled child. Because the assets are owned and managed by the trust, the child can benefit from the assets in the Special Needs Trust and still maintain eligibility for government benefits.  

So how does the Special Needs Trust work?  

• A trust document is created by who is called a grantor or a settlor. The grantor sets up the trust and provides the assets. 
• The person with special needs becomes the beneficiary of the trust.  
• A trustee manages the assets and distributes funds according to the terms of the grantor. 
• The trustee ensures that the assets are used solely for the beneficiary.  
• Once the trust is signed, it is effective immediately 

The Special Needs Trust can be established while the parents or guardians of the child are alive. It can also take effect when they die, through the provisions of a will. Usually, a trusted family member or close friend who knows the beneficiary is made the trustee.  

What are the responsibilities of a trustee? 

• Manages assets and funds according to the terms of the trust 
• Stays up to date with the laws of eligibility for government benefits so as not to jeopardize the eligibility of the beneficiary  
• Maintains records of all spending  
• Uses trust funds and assets only for the beneficiary  
• Creates annual reports as requested by the government  

The trust ends when the beneficiary dies. The trustee is authorized to terminate the trust when the beneficiary no longer qualifies to receive the benefits of it.  

How can the Special Needs Trust be spent?  

Funds from the Special Needs Trust are intended to supplement government benefits. Using these funds for some expenses can disqualify the eligibility for government benefits. Funds can be used for any other need of the beneficiary except basic amenities like food and shelter. Spending trust funds on food and shelter can reduce Supplemental Security Income benefits. Examples of expenses you can fund through the Special Needs Trust include education, cars, vacations, home furnishings, recreation, etc.  

How can you fund a Special Needs Trust?   

Here are a few ways you can fund a special needs trust: 

• Personal assets like cash 
• Life insurance  
• Retirement plans  
• Tangible assets like real estate, cars, etc.  
• Investments  

Types of Special Needs Trust  

First Party Special Needs Trust 

This type of Special Needs Trust is created and funded by the person who will use it for themselves in the future. A person already living with an injury, disability, or chronic illness can open a First Party Special Needs Trust as long as they are mentally sound. This type of Special Needs Trust does not jeopardize eligibility for government benefits. However, you must carefully observe the guidelines of operation to make sure the assets are not counted as yours. You should consider getting advice from your lawyer on how to operate the trust. 

Third-Party Special Needs Trust 

This type of special needs trust is created and funded by someone other than the beneficiary. For example, a parent or grandparent can set up a third-party special needs trust for their child or grandchild with disabilities.  

Pooled Special Needs Trust  

This type of Special Needs Trust is created by non-profit organizations. These organizations invest funds from multiple families to support multiple beneficiaries. The organization chooses its trustee, and the trustee distributes funds to all beneficiaries.  

In summary, Special Needs Trusts are beneficial and can provide for your loved ones without negatively affecting their government benefits. You can have peace of mind knowing your loved ones with special needs are well-taken care of.  

The overview of investment tools offered above may not be suitable for all families. It is recommended that you seek guidance of an experienced legal professional. A lawyer with financial planning expertise will be able to advise you based on your specific needs and Special Needs Trust in your state.

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