If you are the parent of a child with special needs, you may need to set up some special protections in your estate plan to ensure he or she will be properly cared for when you pass away, especially when your child reaches adulthood. The most common way to do this is by establishing a special needs trust.
A special needs trust (SNT) can be used to protect the assets you or your family wish to leave to your child. The SNT involves a donor, trustee, and beneficiary. The donor supplies the funds for the trust, while the trustee holds and administers the funds as the donor intends. An SNT when drafted properly allows the beneficiary (the individual receiving the benefits) receive supplemental support above and beyond (and totally separate from) the government benefits received by them – without those supplemental assets being counted against them for purposes of qualifying for or receiving federal benefits.
Here’s what you need to know about special needs trusts and the advantages of establishing one.
Types of special needs trusts
There are three main types of special needs trusts: first-party, third-party, and pooled. Each trust has its own terms and benefits.
1. First-party special needs trust
A first-party SNT is commonly used when a child with special needs who, unfortunately, directly and personally inherits money or property because there was no third-party SNT planning done by the individual from whom the child is now inheriting. This type of SNT is also used when an individually receives a personal injury or other large settlement. The use of the SNT is made in order to permit the individually the ability to still qualify for government aid, such as Medicaid.
With a first-party SNT, any portion of the assets which remain unused by the beneficiary will become the property of the government, reverting to Medicaid as a pay-back mechanism.
2. Third-party special needs trust
A third-party SNT is created by a parent, grandparent, or other third party who wishes to leave assets (commonly life insurance) for the benefit of a special needs child without fear that doing so will disqualify that child from qualifying for other federal government benefits such as Medicaid. The Trustee of such an SNT (similar to the First-party SNT) has absolute discretion over the use of the assets in this Trust, and they must familiarize themselves with the applicable POMS rules to ensure that distributions they make for the benefit of the child (never directly to the child) do not disqualify the child from his or her federal benefits nor result in a reduction in the amount of such benefit.
With a third-party SNT, unlike a first-party SNT, any unused assets which remain in the SNT can be re-directed to another family member or even the descendants (if any) of the special needs child.
It is generally best to prepare an SNT as a separate, stand-alone document when preparing your estate plan, so that any third party family member, sibling of your special needs child, or other family friend can name that SNT as a beneficiary if they desire to benefit your child without risking your special needs child losing his or her government benefits and allowing other family members or friends to be named as alternate or successor beneficiaries should your special needs child fail to exhaust all of his or her SNT assets prior to his or her death.
3. Pooled special needs trust
Pooled SNTs are unique because they are established and administered by nonprofit associations, often subject to government oversight to prevent mishandling and abuse. This type of SNT is used when a child’s family or a child do not have sufficient personal assets to justify the creation and funding of a separate SNT solely for the child’s benefit. Instead, whatever assets are there for the child are pooled with the assets of many hundreds or thousands of other similarly situated special needs children, and all are then able to draw from this pool of assets in order to supplement their needs where their government benefits are insufficient to support or pay all their needs. At the death of a participating special needs child, any unused assets from that child’s original contribution is retained by the pool and used for other surviving, participating special needs children drawing from those pooled funds.
Is a special needs trust right for your family?
There are many reasons why you might consider establishing a special needs trust:
- Protecting necessary assets: If you want to ensure your child’s inheritance is protected from unscrupulous individuals or creditors, naming a trusted individual or bank to serve as manager and gate-keeping during your child’s lifetime, an SNT is something you want to consider.
- Preserving family wealth: When you establish a Third-Party SNT for your child, you can provide a mechanism that ensures any portion of the assets transferred to the SNT after your death that are not used by the death of your child pass onto other siblings or family members, or a charity designated as a “legacy gift” by you.
- Ensuring government aid: Naming the special needs child as a direct beneficiary will hinder the amount of support (medical or otherwise) he or she may receive from the government. Using an SNT provides a mechanism by which a child’s needs can be supplemented by what you leave them while avoiding the risk of costing them valuable government assistance.
- Appointing a trustee: Depending on the duration of the SNT, it may be prudent to select a corporate trustee (often a bank or a dedicated trust management organization) rather than just an individual trustee to provide ongoing management of the trust assets for your special needs child. An SNT can provide for a Trust Advisory Committee that includes siblings, a nurse, CPA, Certified Financial Planner, or others to serve as a kind-of Trust protector and as a hands-on caretaker to your child, even while having the assets of the SNT managed by a corporate trustee.
You can learn more about trust funds and how to establish them in our blog post.
Contact an experienced estate planning attorney for help
If you need help establishing a special needs trust for your child, the Law Office of Patricia E. Tichenor can help. We’ll work with you on your estate plans to ensure your child’s rights and needs are protected for throughout their lifetime.