Commentary

Does My Child Need a Special Needs Trust?

As the parent of a special-needs child, you often must take life’s challenges no more than one day at a time. Adding the weight of special needs planning, such as public benefits, programs, and legal options onto your daily load may feel impossible. You know some of these resources would likely benefit and protect your child—if only they weren’t so complex and inaccessible.

Well-meaning family and friends often have recommendations (on all topics!) of what you need for your special-needs child. But, when it comes to special needs planning, the answer is not “one size fits all.” A special needs trust (SNT) is one legal tool that may be right for you. This overview explains your options and answers some basic questions.

What Is a SNT?

A SNT is a legal tool that (1) allows assets to be held for the benefit of a special-needs child; are (2) managed by a trustee, often a parent; and (3) protects the availability of your child’s existing or future means-tested public benefits. Critical to the SNT is that your child can never mandate disbursements to herself. At all times the trustee(s) directs how SNT assets are distributed. Your child can never serve as trustee.

What Are the Types of SNTs?

There are several different types of SNTs, and your specific circumstances dictate what SNT is best for you.

First-party SNTs: A first-party SNT is right for a special-needs child who owns her own assets but needs or will need public benefits to afford her care. Examples include a birth-injury settlement, a personal-injury lawsuit award, or your child’s existing assets.

A parent, grandparent, guardian, or even your adult child may establish the SNT. Your child’s assets are transferred to the SNT, a trustee is appointed, and the child is beneficiary of the trust. At your child’s death, Medicaid is reimbursed with leftover funds, to the extent Medicaid was providing benefits to your child at her death. In certain cases, an ABLE account can be used in place of a first-party SNT.

Third-party SNTs: A third-party SNT is appropriate when assets to be transferred to the trust belong to anyone other than the child. Anyone can establish the trust, a trustee is appointed, and your child is the beneficiary of the trust. With specific limitations, ABLE accounts may be used in place of a third-party SNT but are rarely appropriate because of Medicaid-payback requirements.

Two examples where a third-party SNT would be appropriate are (1) Substantial Go Fund Me funds have been raised for a child who has been critically injured in an accident and who may require Medicaid benefits in the future to afford care; and (2) A grandparent wishes to assist financially with your special-needs child’s college tuition, books, and rent but does not want to destroy the Medicaid and SSI benefits she is currently receiving.

Leftover third-party SNT funds cannot be reclaimed by Medicaid at your child’s death. Instead, funds are distributed to “remainder beneficiaries” named in the document.

Testamentary third-party SNTs: A testamentary third-party SNT is simply a third-party SNT embedded within a last will and testament. Rather than your special-needs child inheriting assets outright (which would destroy means-tested public benefits), assets are re-routed to a SNT established in the will. Your child will never control financial distributions; a trustee is named in the will to manage the assets. These same features can also be used in a parent’s revocable trust.

Testamentary SNTs are essential for parents of a special-needs child. Oftentimes, particularly when your special-needs child is (1) young, (2) both parents are healthy, and (3) no windfall or award to the child is expected from another source, a testamentary SNT is the only immediately appropriate special needs planning tool you need to employ.

Although special needs planning may feel daunting, it is nevertheless critical for parents of a special-needs child. When your child’s needs require the financial assistance made possible by benefits such as Medicaid and SSI, you simply cannot afford to put personal funds on the line. Understanding and implementing the various special needs trusts is an essential step in protecting your special-needs child.