Embracing Trusts to Help Children with Special Needs

This article is brought to you by Wealth Management by CommunityAmerica, courtesy of National Advisors Trust Company.

If you have a child or family member with a disability or chronic illness, you’re likely intimately aware of their short and long-term financial, access, and functional needs.

By setting up a special needs trust, you can gain peace of mind knowing your child or dependent will be cared for after you pass—without compromising their eligibility for essential public assistance benefits.

Learn about the intricacies of special needs trusts and how they can be used in your estate plan to help secure your loved one’s financial future.

What is a Special Needs Trust?

Some government programs that support people with disabilities, such as Medicaid and Supplemental Security Income (SSI), are only accessible to those below a limited asset and income threshold. For instance, to qualify for SSI, an individual’s countable resources must not exceed $2,000.¹

A special needs trust (SNT) is a legal arrangement and fiduciary relationship, typically created by a parent or grandparent, to hold assets for a child with a physical or mental disability.

Assets in a SNT are owned by the trust, which allows you to pass on wealth without disrupting your beneficiary’s disability benefits. Because SNTs are typically irrevocable, assets within them may be shielded from creditors and lawsuits.

Proceeds from an SNT trust can only be used for expenses not covered by public assistance, such as out-of-pocket medical and dental costs, therapy or rehabilitation services, transportation, entertainment, travel, and education.

Due to the legal complexities and state-specific restrictions on benefits, we recommend speaking with your attorney and financial advisor to help you understand how SNTs may fit into your family’s estate plan.

Different Types of Special Needs Trusts

There are three primary types of special needs trusts that you may want to consider depending on your child’s unique circumstances and needs. These include:

Third-Party Special Needs Trusts

Also called supplemental needs trusts, parents, grandparents, or siblings commonly establish third-party SNTs to plan for loved ones with disabilities. However, anyone other than the beneficiary can create and fund an SNT with gifts, life insurance policies, and other assets.

Third-party special needs trusts can also be included in a Last Will and Testament or created within a living trust, but they will not go into effect until after your death.

Accordingly, a stand-alone SNT may be a better option, particularly if multiple donors (such as relatives or friends) would like to contribute to the trust throughout the beneficiary’s lifetime.

First-Party Special Needs Trusts

First-party or self-settled SNTs allow people with special needs to hold their own assets in a trust while maintaining eligibility for certain government benefits. However, these trusts must be established and funded before the beneficiary is 65.

Self-settled SNTs are typically used when an individual with a disability inherits assets outright or receives a legal settlement. They can also be beneficial if a person becomes newly disabled and owns assets in their name that may prevent them from qualifying for public benefits.

According to the Special Needs Alliance, assets in a first-party SNT must be used to repay “total lifetime medical assistance benefits” such as Medicaid, but third-party trusts are not subject to these repayment rules.²

Pooled Special Needs Trusts

Non-profit organizations manage pooled SNT programs to benefit multiple beneficiaries simultaneously. They can be used for third-party and first-party SNTs. If the beneficiary dies, assets in their individual account are used to reimburse the state for Medicaid services, and leftover funds are transferred to the remainder beneficiary.

Thanks to the passage of the Special Needs Trust Improvement Act, a nonprofit charitable organization can now be named as the remainder beneficiary of an SNT.³ This gives families the option to support a nonprofit that has provided essential services to their disabled loved one in the event they pass away prematurely.

Other Important Considerations

Unfortunately, individuals with certain disabilities can be more vulnerable to financial abuse by strangers, acquaintances, and people close to them.

A key benefit of setting up a SNT is ensuring the trust assets will be distributed and used precisely as you intend. Because special needs trusts are typically irrevocable, their assets are shielded from creditors and lawsuits.

Given the stakes, it’s essential to choose a responsible and knowledgeable person to oversee the SNT and ensure your child’s best interests are protected. The trustee must serve as the administrator, determine how funds are invested and distributed, stay current with relevant disability laws and regulations, file tax returns, and more.

Given the time-consuming and complex fiduciary duties, we advise working with a corporate trustee with proven expertise and a robust understanding of trust accounting, such as National Advisors Trusts, rather than placing this responsibility on a friend or family member.

If you prefer to be more directly involved, consider serving as co-trustee with a professional trustee. This would allow you to provide insight into your child’s evolving needs while benefiting from the knowledge and experience a corporate trust administrator offers.

Trust in Us to Protect What Matters Most

If you have a child with a disability, there’s nothing more important than ensuring they are well-positioned to thrive now and in the future. A special needs trust can be a valuable estate planning tool to help you financially support your loved one’s quality of life when you are no longer around.

As the country’s premier independent trust company, National Advisors Trust offers the flexibility of a corporate-directed trust model and a proven track record ensuring diligent trust administration and fulfillment of fiduciary duties.

Speak with your attorney and financial advisor today about embracing special needs trusts in your estate plan. If you don’t have an advisor, we can connect you with one from our comprehensive national network.