Special needs trust: 8 steps to securing a plan for future care

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Protecting your greatest assets: Your family.

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If you are caring for a family member with special needs or facing a diagnosis that may require special care, your responsibilities extend beyond today’s needs. Establishing a plan now will help ensure access to resources, care, and financial stability even as circumstances change. 

Estate planning isn’t just for wealthy people—it’s essential for most families. And if there’s a special-needs member in your family, establishing clear plans and directives takes on a new level of importance. Such a plan might include a special needs trust (SNT). An SNT can help your family member, dependent adult, or child take advantage of government assistance while preserving the estate’s assets for when they might be needed later in life.

A special needs trust holds assets for the benefit of someone with disabilities. It’s typically a type of irrevocable trust. The trust is managed by a designated trustee, who is responsible for disbursing money from the fund in a way that doesn’t affect the recipient’s eligibility to receive government assistance.

Special needs trusts may be one of three types: first party, third party, or pooled. First-party SNTs are funded directly by the beneficiary, while third-party SNTs are funded with assets from others, such as friends and family.

Pooled special needs trusts are more complex and typically managed by a professional trustee, often a nonprofit organization. The trustee aggregates funds for multiple beneficiaries into a pool that’s managed collectively, although each beneficiary retains a separate subaccount.

The main purpose of an SNT is to provide financial support to a person with disabilities while preserving their eligibility for Medicaid, Supplemental Security Income (SSI), or other needs-based government programs. The funds in a special needs trust may be used only for “qualified” expenses that aren’t already covered by government assistance.

Some examples of qualified expenses include:

Estate planning for loved ones can be overwhelming, especially when it comes to those with special needs. Understanding how to establish a special needs trust can help you feel more confident about the process. Here are eight steps to take.

First, select the type of special needs trust that’s most appropriate. For example, you’ll need to choose between an individual or pooled special needs trust. Your choice depends on these key factors:

If you’re forming an individual SNT (rather than pooled), your next move is to select a trustee to manage the fund. The trustee may be a family member, friend, professional (such as a lawyer), or a nonprofit organization.

After you’ve selected your trustee, you’re ready to draft the trust document. A lawyer specializing in estate planning can assist with creating this legal filing, which identifies the trustee and defines the purpose of the trust and how it will be managed.

With the SNT legally established, you’re ready to make your first deposit—an important milestone. A special needs trust may receive various assets, including cash, stocks, bonds, real estate, and insurance proceeds. For many families, the process of funding a special needs trust is ongoing for years or decades.

The beneficiary or their legal guardian is empowered to request financial support from the trust as needed. Written requests, while perhaps burdensome, must be submitted to pay for specific expenses.

Upon receiving a distribution request, the trustee reviews the request to determine if the expense is qualified. The trustee pays for a qualified expense by disbursing funds directly to a retailer, service provider, or other third party. 

Among the numerous responsibilities of the trustee are monitoring the SNT and maintaining detailed records. For compliance and auditing purposes, every disbursement is recorded along with the details of the qualified expense.

Trustees may also periodically review the trust’s performance, focusing on investment returns. The trustee assesses how that performance aligns with the beneficiary’s needs and any changes to their government benefits.

After the beneficiary’s death, any remaining funds in the special needs trust are distributed.

The SNT is generally considered dissolved after all assets are distributed and no further financial obligations remain. When complex assets are involved, the trustee may take formal steps to close the trust, such as by notifying the appropriate parties or preparing a final accounting statement.

You may be wondering if your family can even use an SNT. Regardless of the type of special needs trust, the eligibility criteria for the beneficiary is much the same. The beneficiary must be a person with a disability as defined by Social Security Administration (SSA) criteria. This generally means that a physical or mental impairment significantly limits the beneficiary’s ability to work or carry out daily activities.

First-party special needs trusts may be created only for individuals who are under age 65 when the trust is established. Third-party special needs trusts and pooled trusts are not associated with any age restrictions.

You may be familiar with means testing, the process of determining a disabled individual’s eligibility for SSI, Medicaid, or other government benefits based on the resources available to them.

To preserve your loved one’s eligibility for government support, avoid using a special needs trust to:

Establishing a special needs trust typically requires a lawyer; the support of family members is also beneficial. It can be challenging to provide for a disabled loved one after a parent or guardian dies, especially if other family members have concerns about how the estate is divided.

Choosing the right type of special needs trust is a solid first step—one that can be bolstered by clear, open communication with everyone involved.