How to Set Up a Special Needs Trust: Expert 6-Step Guide

Who Needs a Special Needs Trust?

Understanding who to set up a special needs trust for is essential for families caring for a loved one with a long-term disability. It preserves access to public assistance while providing for future well-being. These trusts are especially important for individuals who rely on public benefits tied to asset or income limits. By keeping personal finances separate, families ensure continued access to services like Medicaid and SSI.

Parents, grandparents, or legal guardians typically set up the trust, though individuals with disabilities may also create it under certain conditions. The SSA offers a Listing of Impairments to help determine eligibility. This guide ensures families are on the right track when setting up the trust.

The Types of Special Needs Trusts

When you plan a special needs trust, it’s important to understand the available options. The right choice depends on your child’s financial situation and care needs. Types like first-party, third-party, and pooled have specific rules, and these affect funding sources and government benefits eligibility. These factors also impact the cost of creating a special needs trust.

• First-Party Special Needs Trust: Funded with assets from the individual with a disability, often after a settlement.
• Third-Party Special Needs Trust: Funded by family members to protect eligibility for benefits.
• Pooled Trust: Managed by a nonprofit, pooling resources while keeping individual accounts.
• Revocable vs. Irrevocable Trusts: Revocable trusts can be changed, while irrevocable trusts provide more protection.
• Testamentary vs. Living Trusts: Testamentary trusts are set up through a will, while living trusts are established during the parent’s lifetime.

What Can and Cannot Be Paid for by a Trust

Setting up a trust for a special needs child provides a way to cover essential expenses without affecting government aid. However, there are clear guidelines on what the trust can and cannot pay for. The funds must supplement, not replace, services like Medicaid or SSI. Understanding these restrictions ensures the trust remains compliant and doesn’t impact eligibility.

Here’s what a special needs trust can and cannot pay for:

Allowed:

• Education, including specialized programs and tools.

• Medical and dental care not covered by insurance.

• Personal care attendants or aides for daily living.

Not Allowed:

• Direct cash gifts to the beneficiary.

• Basic housing and food, unless managed properly.

Consult a Special Needs Attorney

Working with an experienced attorney is key in special needs trust planning. An attorney can help you navigate Medicaid, SSI, and benefit eligibility rules. They ensure the trust is properly structured and legally binding. Consulting a professional avoids costly mistakes that could affect your child’s future.

Here’s how an attorney can assist:

• Help you find an attorney specializing in special needs trust planning.
• Discuss your child’s care needs to create a comprehensive trust plan.
• Ensure compliance with state and federal regulations.

Choose a Trustee

Choosing a trustee is essential for setting up a special needs trust. The trustee will manage the trust based on your child’s needs. They must understand your child’s care requirements and government benefits. The trustee must also be familiar with how benefits interact with the trust.

Consider these points when choosing a trustee:

• Choose a family member, professional trustee, or a combination of both.
• Ensure they can handle the trust’s day-to-day management.
• Choose someone familiar with eligibility rules and your child’s needs.

Decide on Trust Type and Structure

Special needs parents must evaluate trust types to meet their long-term goals. This decision impacts funding sources, timing, and benefits eligibility. Whether it’s a first-party, third-party, or pooled trust, each option offers distinct advantages. Carefully consider these options to ensure your child’s future care needs are met.

Key factors to consider when deciding on a trust structure:

• Choose a trust type (first-party, third-party, or pooled) based on financial needs.
• Decide whether a living trust or testamentary trust fits your timeline.
• Evaluate if a revocable or irrevocable trust offers better protection.

Fund the Trust

Funding the trust is crucial in how to plan a special needs trust. The funding method determines how well the trust supports your child’s needs. Whether through savings, life insurance, or other assets, allocate sufficient resources. Regularly review your funding strategy to ensure the trust remains sustainable.

Here are some key funding tips:

• Use life insurance policies as a long-term funding solution.
• Allocate savings, investments, or estate proceeds to the trust.
• Avoid titling assets in your child's name to preserve eligibility.

How Much Should You Fund the Trust With?

Creating a special needs trust also involves estimating realistic funding amounts. You need to consider long-term costs such as care, therapy, housing, and emergencies. It’s important to estimate these costs so you can properly fund the trust. A financial planner can help guide you in determining the right amount based on your child’s future needs.

Name Remainder Beneficiaries

Once your child’s needs are met, decide who will receive any remaining assets in the trust. Naming remainder beneficiaries ensures your family’s wishes are honored and the trust meets your long-term goals. This decision helps guide the trustee in managing leftover assets and impacts your special needs caregivers. Be sure to update beneficiaries as your family circumstances change, ensuring the trust remains aligned with your needs.

Update Legal Documents

Keep your estate planning documents up to date to align with special needs and trust planning. Outdated documents can lead to unintended consequences and disrupt eligibility. Regular updates ensure your child’s future care is well-supported. Work with your attorney to maintain current, compliant paperwork.

Here’s how to keep your legal documents updated:

• Review wills, powers of attorney, and guardianship documents regularly.
• Align your estate plan with your child’s trust structure.
• Schedule check-ins with your attorney to keep documents current.

Common Mistakes to Avoid When Setting Up an SNT

Families learning how to create a special needs trust should watch out for common pitfalls. Mistakes like giving direct gifts to the child or choosing an unqualified trustee can have serious consequences. It’s also important to regularly review the plan to adjust for changes in your child’s needs. A well-thought-out plan, reviewed periodically, ensures continued benefits for your child.