Special Needs Trust Options

Young boy in wheelchair with special needs laughing with his female caretaker
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A special needs trust (sometimes called a supplemental needs trust), is a trust designed to hold assets for the benefit of a person with disabilities or special needs. The trust is designed so that the beneficiary can retain eligibility for government benefits such as Medicaid and SSI, while still allowing the trust assets to be used for the beneficiary’s supplemental needs.

Two Kinds of Special Needs Trusts

There are two different types of special needs trusts: the self-settled trust and the third party trust:

Self-Settled Special Needs Trust

The first type of trust, a self-settled special needs trust, is often used when damages are to be paid to an injured person. This trust is created and funded with assets belonging to the beneficiary.

Sometimes the personal injury settlement or verdict arose out of the incident that created the disability, but not necessarily. Holding the settlement or judgment in a special needs trust permits the beneficiary to live with more dignity and comfort.

The funds in the trust can be used to supplement benefits received from various governmental assistance programs including Supplemental Security Income (SSI) and Medicaid. The beneficiary does not have direct control or access to funds in the trust. It is managed by a trustee who has broad discretion to make distributions on behalf of the beneficiary to provide for superior care options, opportunities for treatment and rehabilitation, housing, electronic equipment, computers, job training, vacations, and so on. 

In order for a self-settled special needs trust to be exempt as an asset for benefits qualification, it must pay back the government for services provided if there is anything left in the trust when the beneficiary with a disability or special needs dies.

Third-Party Special Needs Trust

The second type of special needs trust is one that is created for the beneficiary by others. This trust is created by someone else (or a third party) for the benefit of the child or disabled person, usually by a parent or grandparent.

If you are a parent of a child with special needs, how you leave your child’s inheritance to him/her can greatly affect the child’s quality of life after your death. An outright inheritance will immediately cause all government benefits to stop. Your child will have to pay 100% of medical care expenses, medicines, personal care attendants, therapy, doctor visits, and room and board wherever they are living. This will continue until the entire inheritance is exhausted. Then your disabled child will re-qualify for benefits.

If the inheritance is exhausted because it had to be spent down to re-qualify for benefits, there will no longer be additional funds to pay for education, over-the-counter medicines, trips to see family members, reading materials, basic supplies, or other expenses. Government benefits do not cover these types of expenses.

Rather than giving the inheritance outright (or even worse, disinheriting the child with special needs), these parents should include special needs trusts in their estate plans. The special needs trust does not provide funding for basic food, clothing, or shelter. However, a wide variety of supplemental needs can be paid for. The trust might be able to buy a house for your disabled child to live in or could pay for an advocate that will make sure that your child receives the services they need.

Grandparents and other relatives can add to the trust. When the child with special needs dies, the balance remaining in the trust can be distributed to other family members. It is important to note that this type of trust requires advance planning. It is important to talk to your estate attorney now to include it in your estate plan.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.