Written by Tony Chiaramonte on 02/15/2021

What is a Special Needs Trust?

Many people with special needs face numerous expenses due to their disability or impairment. At the same time, these individuals also often rely on government benefits such as Medicaid benefits or Supplemental Security Income (SSI) benefits. 

A special needs trust is one way to allow someone with special needs to maintain a higher quality of life. It gives them access to funds that can be used to pay for a variety of common disability expenses, without sacrificing their eligibility to receive public benefits.  

What Is a Trust?

Before getting into the details of special needs trust, it’s important to understand a few basics about trusts in general. 

A trust is a legal relationship formed between at least three parties: the settlor or grantor, the trustee, and the beneficiary. 

A trust is created through a trust instrument, or trust document, which identifies all the parties and defines their roles. Below is a brief description of each, and their role in the creation and execution of a special needs trust. 

The Settlor or Grantor

The person who sets up the trust is called the settlor or the grantor. In many cases, the grantor is a parent, grandparent, or sibling of the person with special needs. They may wish for their loved one to receive assets from them without waiting through the probate process. When any of these parties creates the trust, it is called a third-party special needs trust, or third-party SNT. 

However, in some cases, an individual with special needs comes into a significant amount of money and will open the trust themselves. In this case, the trust is considered a first-party special needs trust. These are also called pooled trusts. 

There are important differences between first- and third-party special needs trusts. 

For example, after the death of the beneficiary (the person whom the trust is to benefit), the funds remaining in a first-party special needs trust must be used to pay the state back for any benefits the beneficiary received. 

This is not the case in third-party special needs trusts. When the primary beneficiary dies, the trust fund assets will transfer to any remainder beneficiaries (others named to benefit from the trust). 

The Trustee

The trustee is the person who manages trust assets for the benefit of the beneficiary. The trustee is the person responsible for approving all expenses coming out of the trust. Trustees owe the beneficiary several legally defined duties, including:

• The duty of accounting

• The duty of communication

• The duty of compliance

• The duty of confidentiality

• The duty of loyalty

• The duty of productivity

• The duty of protection

• The duty of prudence

• The duty of retention

• The duty of skill and care

As the list above illustrates, a special needs trust confers many duties and obligations upon the trustee. For example, they must invest trust assets appropriately, handle all requests from the beneficiary, keep track of all disbursements, and file a trust tax return, among other things. 

It should be noted that the trustee of a special needs trust does not fulfill the same duties as a legal guardian. Most simply, a trustee takes care of the financial needs of the trust and its beneficiary. A guardian, however, is responsible for completing logistical actions and making decisions that affect the beneficiary’s personal life, such as living arrangements and medical care.

Some grantors choose to have a professional trustee manage the trust, while others name a friend or family member as a trustee. Trustees who have questions about their responsibilities should reach out to an estate planning attorney for assistance. 

The Beneficiary

The beneficiary is the person for whom a trust is established. Typically, a disabled beneficiary qualifies for Medicaid or Social Security Administration benefits. 

However, these programs impose an asset limit as well as an income limit for each recipient to remain eligible for benefits. Thus, if someone receives a large sum of money, they may lose their benefit eligibility. 

How a Special Needs Trust Works

Typically, a special needs trust is required when family members want to set aside additional money for a loved one with special needs, but do not want to jeopardize their loved one’s SSI or Medicaid eligibility. 

In some cases, an individual with special needs will come into a significant amount of money and may set up the trust themselves. For example, someone may receive an inheritance, settle a personal injury case, or receive the proceeds from a life insurance policy. 

When a grantor sets up a trust, they name a trustee, who oversees the distribution of trust assets. The trustee should have both a knowledge of the governing laws and also a good relationship with the beneficiary. 

When the beneficiary wants to make a qualified purchase, they request that the trustee use trust assets. The trustee then considers the request and determines if it is an eligible expense. If so, the trustee uses trust assets to pay for the item or service. 

Trustees should generally not distribute cash directly to the trustee, as this may count as “income” for the purposes of reporting to government programs. 

What Can a Special Needs Trust Pay For?

The trustee is responsible for making all distributions to the beneficiary. This is an important role. 

If a trustee makes an unqualified distribution, the amount paid out of the trust may be considered as “income” of the beneficiary, which impacts their benefits standing. Thus, trustees must understand what expenses they can — and more importantly, cannot — approve. 

Generally, such trusts can pay for any supplemental needs of the beneficiary. A supplemental need is something that is not covered by other government benefits, as are food and shelter. 

That being the case, a trustee should not make distributions for these expenses. It is also generally a bad idea for a trustee to provide cash or cash equivalents directly to the beneficiary. 

However, there are plenty of everyday expenses that trust funds can pay for. These include:

• Computers

• Furthering the beneficiary’s education 

• Equipment, including wheelchairs or other assistive devices

• Homes

• Insurance premiums

• Job training and certification courses

• Medical expenses not covered by other sources

• Public transportation costs

• Recreation and entertainment

• Seed money for starting a business

• Therapy or rehabilitation costs

• Travel, including the cost of bringing along a friend or family member

• Vehicles

At first glance, it may seem like some expenses listed above would fall into the “food or shelter” category, such as the purchase of a home or paying for long-term care. However, under certain circumstances, each of the above expenses can qualify as an allowable expense. 

Of course, there likely will be many questions about whether a specific expense can be paid out of the trust. An attorney can not only answer a trustee’s questions about allowable expenses but also can assist with other benefit-related issues. 

Attorneys who handle special needs trusts also typically handle other types of trusts, as well. They can assist clients with a broad range of estate planning and elder law matters. 

How to Set up A Special Needs Trust

Determine the appropriate type of trust

The first step to setting up a special needs trust is to determine the right type of trust. There are a few types of special needs trusts. 

If the funds that will be used to create the trust already belong to the soon-to-be beneficiary, a pooled trust is likely the best option. In a pooled trust, the assets go into a separate account but are pooled together for investment purposes. 

However, if friends or family members will be contributing funds to create the trust, a third-party or non-pooled trust is probably appropriate. 

Select a trustee

Once the correct type of trust is determined, the next step is to think about who will serve as trustee. 

The trustee plays a crucial role in the functioning of a special needs trust. This should be someone who has the time and knowledge necessary to effectively administer the trust. 

The grantor also should consider naming an advocate for the trust beneficiary, especially if the trustee is not a loved one. An advocate is someone to whom the beneficiary can turn for questions, and who can help the trustee in their interactions with the disabled person. 

Create the trust document

After deciding who will serve as trustee and naming an advocate, the next step is to meet with a special needs planning or elder law attorney to create the trust document. 

It is important for individuals or families creating a special needs trust to work with a knowledgeable attorney. These are complex legal documents that should be custom-tailored to a family’s unique needs. 

While undoubtedly DIY options exist out there, these generally fail to consider the unique aspects of a family’s needs. These may not satisfactorily address all concerns. 

For example, if the trust is not set up correctly, or the trustee makes unqualified distributions out of the trust, it may affect the beneficiary’s eligibility for benefits. This ultimately would defeat the purpose of creating the trust, as the beneficiary could lose their government benefits. 

Ask an Estate Planning Attorney About Special Needs Trusts

If you have a loved one with special needs and the means to provide them with additional support, a special needs trust may be a good option. While the concept is relatively straightforward, the nuances that go into properly setting up a special needs trust are quite complex. 

For example, opening an ABLE account may be a good idea, to give the beneficiary additional control over their own finances. Often, the best approach is to consider all an individual’s needs and create a comprehensive plan to take care of everything, rather than approaching it piecemeal. 

These are not decisions to make if you’re underinformed. Those considering creating a special needs trust should consult an experienced special needs or elder law attorney to ensure that the trust complies with all legal requirements. 

Many estate planning and elder law attorneys offer a free consultation, during which they can answer all of your preliminary questions. As a side benefit, they generally can answer other elder law or estate planning questions. They also can give you an estimate as to what the total cost would be for creating the trust. 

There is no obligation to hire a lawyer after meeting with them, so families are encouraged to make an appointment to learn more about the process.  

The above information is from a link sent to me by Christy Clawson from wondermoms.org on 12/06/2021