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Understanding the basics of special needs trusts


Financially supporting a loved one with special needs can be tricky. Learn how to do it the right way.

Parents of children with special needs face unique challenges when it comes to estate planning. In fact, even providing for your child after he or she reaches adulthood requires careful forethought.

When your child turns 18, he or she will likely rely on public assistance as a primary means of support. Yet this situation creates a problem when you want to continue financially supporting your child in meaningful ways. Benefits such as Supplemental Security Income (SSI) and Medicaid have income and asset limits. If you give your child property outright, it may disqualify him or her from much-needed benefits.

Maintaining your child’s eligibility for public assistance – while still ensuring that he or she enjoys a high quality of life – requires a properly drafted special needs trust.

What is a special needs trust?

A supplemental care special needs trust (also called a discretionary special needs trust) offers parents and loved ones the ability to provide for adult children with special needs – without jeopardizing their public benefits.

A trust is a vehicle for owning and managing property for the benefit of a specific individual or group (the beneficiaries). In the case of a special needs trust, the property is held and managed for the benefit of a loved one with disabilities. Put simply, because your loved one won’t actually own the property in the trust, it won’t disqualify him or her from public benefits.

However, this type of trust must be truly supplemental. It may only provide for support and expenses beyond basic needs. The goal of the trust is ultimately to enhance your loved one’s quality of life.

Types of special needs trusts

For a special needs trust to function as it should, it must comply with rigorous requirements. These requirements differ depending on the type of trust.

First-party trust

These trusts are funded with the beneficiaries’ own resources – typically an inheritance, a legal settlement or insurance proceeds. However, a parent, loved one or other third party must establish the trust.

First-party trusts must also contain a payback provision. Any funds remaining after your child’s lifetime must be returned to the state as reimbursement for public benefits. Without this key provision, the trust may render your loved one ineligible for those benefits.

Third-party trust

Third party trusts are funded by someone other than the beneficiary – for example, a parent, family member or friend. The founder (or settlor) can establish the trust at any time during his or her lifetime or after death through a will.

These trusts have a significant advantage over first-party special needs trusts: They don’t require a payback provision. This means the settlor can designate how the remaining funds are distributed after the beneficiary’s death.

Pooled trust

As its name implies, a pooled trust involves multiple beneficiaries with special needs. The trust funds are managed and invested on a pooled basis. However, each beneficiary has her or her own account. These accounts may be funded by the beneficiary’s own resources or by a third party’s.

Upon the beneficiary’s death, the remaining funds in his or her account can be reimbursed to the state or returned to the pooled fund to benefit others with special needs.

Because these trusts are professionally managed (typically by a nonprofit organization), they offer greater convenience for those who don’t have the time or inclination to serve as trustees themselves. They also provide a cost-effective alternative to hiring a professional trustee on your own.

Which type of trust is right for you?

If you are considering establishing a special needs trust for your loved one, consult with an attorney about your specific situation. The attorneys at Criss Law Group PLLC in Dallas, Texas, can assist you in making an informed decision that’s right for your family.

Keywords: trust, special needs, special needs trust, estate planning, first-party trust, third-party trust, pooled trust