When To Consider Establishing a Special Needs Trust

If you have a loved one with special needs, establishing a special needs trust can provide crucial financial protection and support for their future. It’s a legal arrangement allowing you to set aside funds and assets to benefit someone with disabilities. 

But when is the right time to consider establishing one? And how do you set one up? 

First, let’s level set.  

What is a special needs trust?

A special needs trust protects the assets and resources of individuals with disabilities while ensuring they can still receive government benefits. It’s a safety net. It ensures funds are managed and distributed in a way that does not disqualify the beneficiary from means-tested programs such as Medicaid and Supplemental Security Income (SSI). 

The trust can be funded with various assets, such as cash, real estate, or life insurance policies, ensuring that it meets the beneficiary’s needs throughout their lifetime. Additionally, a trustee is legally responsible for managing the assets and making distributions in the beneficiary’s best interest.  

Setting up a special needs trust begins with consulting an experienced trust attorney who can guide you through the legal requirements and complexities. If you’re unsure where to start, your State’s Bar Association’s directories page can help you find a qualified attorney. Once the attorney is engaged, the next step is to draft the trust document, which outlines the terms, conditions, and process for transferring assets into the trust. After the trust is funded, it’s essential to ensure ongoing management and administration by appointing a trustee to oversee it and make decisions about disbursements. Regular reviews and updates are crucial to ensure the trust continues to meet the beneficiary’s needs.

Factors to consider when establishing the trust

Tailor the trust to meet the individual’s unique needs while maximizing their eligible benefits. This includes:   

• Understanding the eligibility requirements for government benefits. Structure the trust so it does not jeopardize the individual’s eligibility for benefits. Certain benefit programs, such as Achieving a Better Life Experience (ABLE) accounts, have specific requirements regarding the amount of money that can be held in the name of a disabled beneficiary bank account without disruption of benefits. A properly structured special needs should work with these programs to support the beneficiary while keeping assets in the trust’s name. 
• Determining the appropriate type of special needs trust. The choice depends on factors such as the source of funds, the beneficiary’s age, and the trust’s intended purpose. The more governance a trust document has, the more oversight will be required to ensure it’s properly administered to adequately serve the beneficiaries’ needs. Some documents include requirements for an independent review of care providers. In contrast, others provide broad discretion for a trustee to manage support and financial decisions on behalf of the named person. The approach is dependent on the needs of the disabled person and the timing/source of funding (during a grantor’s lifetime, at their passing, or from a windfall or settlement paid out to benefit the disabled person), which informs their access to the funds. Consulting with an estate planning attorney should help the best path. 
• Selecting a suitable trustee and successor trustee.  Choose a trustee with the necessary expertise and understanding of the individual’s needs. Additionally, consider who your next-in-line trustee would be. If the primary trustee has to change, you need a successor trustee ready to ensure continuity in trust management. This can be a big ask for a friend or loved one, so carefully consider the role you wish the trustee to play. If this responsibility is better served by an independent party, then a Corporate Trustee can be a great second option to consider.  

Common mistakes to avoid

• Not preserving eligibility for government benefits such as Medicaid and Supplemental Security Income (SSI). Failing to structure the trust correctly can result in the loss of these benefits. Any special considerations should be taken into account when working with an attorney.  
• Failing to update the trust as circumstances change: It is essential to review the terms of any trust regularly to familiarize yourself with the document and be aware of how it will function with any changes in your loved one’s needs or financial situation.  
• Choosing an unsuitable trustee: As noted above, the trustee plays a crucial role in managing the trust and making decisions on behalf of your loved one.  Choose someone who is trustworthy, responsible, and understands the unique needs of individuals with special needs. 

Establishing a special needs trust is a critical step in ensuring the long-term financial security and care of a loved one with disabilities. It not only safeguards assets but also preserves eligibility for essential government benefits. By carefully considering trust structure, trustee selection, and ongoing management, you can create a robust plan that adapts to the beneficiary’s evolving needs.