What is a Special Needs Trust?

Individuals with special needs sometimes require specialized financial planning. One way to provide this is through the creation of a special needs trust. These unique types of trusts are a way for people with special needs to receive financial support without putting their needs-based government benefits at risk.

To understand what a special needs trust is, it’s important to first know what a basic trust is. It’s a document that enables a chosen trustee to hold and sometimes manage assets on behalf of a beneficiary. A special needs trust does the same thing, except it’s designed for people with special needs.

These trusts can be helpful for people with special needs who receive medicaid or supplemental security income (SSI). That’s because there’s a limit on how much you can have in assets to receive social security benefits or other needs-based government benefits. However, a SNT can help people still remain eligible for those benefits and receive other forms of financial support simultaneously. Without a special needs trust, receiving financial support above a certain amount could result in being disqualified from some public benefits.

Aside from this, there are other upsides to having a special needs trust. Some include:

Sometimes being able to protect assets from creditors or lawsuits
The ability to invest funds in the trust
Estate planning since the trustee can determine who gets assets when beneficiary dies
Reduced risk of financial abuse, since beneficiary has some legal protections (fiduciary responsibility) with the trust
Creating financial security for individuals who can’t manage their money independently

Assets in a special needs trust aren’t meant to replace SSI benefits. They should help supplement those benefits and cover costs outside of basics like food and shelter.

For instance, funds in an SNT may help cover costs like rehab, therapy, educational expenses, travel, entertainment, and transport.

Types of Special Needs Trusts

There are multiple types of special needs trusts that exist and each has different advantages. Here are two of the most common:

Third party special needs trust: Also known as a supplemental needs trust, this is the most common and it’s usually funded by a parent or guardian, family member or friend. There are no age restrictions for opening up a third party SNT and just about anyone can open it. However, the beneficiary doesn’t have direct access to funds so that they aren’t disqualified from receiving benefits.

An advantage of a third party special needs trust is that you can list secondary beneficiaries. These are the ‘runner ups’ who inherit the assets in the trust when the primary beneficiary dies. Under the umbrella of third party special needs trusts, you can create both a standalone and testamentary trust. The former enables you to access funds while alive and is ideal for people who want to support their special needs loved ones now. The latter kicks in when the trustee passes away and is usually part of an estate plan.

First party special needs trust: These types of trusts are usually funded with the beneficiary’s assets. It may be fitting for someone who is functional and capable of working. This isn’t to say that a parent, relative, or guardian can’t set up a first party special needs trust on the person’s behalf.

Some scenarios where this account may be beneficial is if an individual received a robust inheritance, won cash in a lawsuit, or recently became disabled but has existing assets that disqualify them from receiving benefits. There are age requirements for first party special needs trusts, however.

Setting Up A Special Needs Trust

Setting up a trust requires multiple steps, but the first is deciding what your wishes for your loved one are. Some considerations include assets you want to put into the trust, how frequently they’ll receive those assets and what needs the money will cover.

Maybe most importantly, think about who you want to appoint as a trustee. Choosing a trusted person can minimize the risk of financial abuse and ensure your loved one receives funds as directed. Individuals as well as corporations can be appointed as a trustee for a SNT.

Once these decisions have been made, the trust can be created. This is where you can get the help of a lawyer who specializes in special needs trusts to draft the document. The next step is for all parties to sign and notarize the document.

Finally, for the trust to be valid, it needs to be funded. This simply means putting assets like bank accounts, investment accounts, life insurance policies or any other assets in the trust’s name.

A special needs trust isn’t right for everyone but it can create financial security for special needs individuals and peace of mind for their loved ones.