What’s a Special Needs Trust? And How It Works.

Steve Pietila
Steve Pietila
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If you provide financial support for a loved one with special needs, you should consider providing support for that person after you are no longer here to help them. If you have a child or other relative with a disability or mental health issues, a Special Needs Trust (SNT) can ensure your loved one retains a good quality of life without the risk of making them ineligible for government benefits.

An SNT is a unique vehicle that can help protect your loved one and provide for financial security long after you are gone.

What is a Special Needs Trust?

An SNT is a type of trust that allows the beneficiary to receive money while retaining eligibility for government-based assistance via Social Security, Supplemental Security Income (SSI), Medicaid, Medicare, etc. SNTs are also known as Supplemental Needs Trusts because the money from these trusts supplements needs that Medicaid, SSI, and other government programs do not cover.

In adulthood, your special needs child may be eligible to receive Medicaid and SSI. After turning 18, the government bases benefit eligibility on their own income and assets. While owning a car, furniture, and personal items does not affect benefit eligibility, money in the bank, brokerage accounts, or other investments will be considered in determining eligibility.

A special needs trust helps protect your child after you are gone, but it requires expert planning. You must name someone as a trustee in charge of handling the trust and spending money on your loved one’s behalf. The trust itself will specify how and when to use the assets.

How Does a Special Needs Trust Work?

An SNT’s structure is similar to many types of trusts. It consists of the following:

  • Grantor—the person setting up the trust, also known as the settlor.
  • Trustee—the trust manager who can make investment and financial decisions. The grantor may name themselves as trustee while adding a successor trustee to take over should they die or become incapacitated.
  • Beneficiary—the person with special needs and assets to protect.
  • Remainder beneficiary—the people or entity receiving the assets remaining in the trust once the beneficiary dies.

With this type of trust, you don’t leave money to your child directly since doing so could impact their qualification for government aid. Instead, you leave it to the trust to provide additional financial protection for your child without calling their government benefits into question.

In most cases, the grantor structures the funds from the trust to supplement, not replace, government assistance. The trustee will release funds from the trust to pay for qualified expenses such as uncovered medical bills, caretaker costs, transportation, cell phone, household goods, computers, and other living expenses to maintain or improve the beneficiaries' quality of life.

Keep in mind that to remain eligible for public funding, the beneficiary often can't use the funds from the trust for food, housing, and other related shelter costs.

Funding a Special Needs Trust

How you fund an SNT is crucial. If you fund the trust with assets that belong to the person with a disability, it's a self-settled or first-party trust which comes with a few more rules, namely that Medicaid will get reimbursed for any expenses once the trust ends.

With a third-party Supplemental Needs Trust, all the funds come from someone else, not the disabled person, making it the most common type of SNT. You might decide to fund this trust with a life insurance policy, retirement account, or other investment vehicles. Under these circumstances, there is no need to reimburse Medicaid. A third party can also fund a Supplemental Needs Trust while they are still alive via a gift.

You can hold any property in an SNT, including stocks, bonds, real estate, and even art and jewelry.

Who Can Set Up a Special Needs Trust?

Not anyone can set up a first-party SNT. Parents, grandparents, a legal guardian, or the court are the only entities permitted to set up these SNTs. Once funded, the trust assets belong to the special needs individual.

Anyone, except for the beneficiary, may establish and contribute to a third-party SNT.

Why A Special Needs Trust Can Be Beneficial

The American Bar Association notes that an SNT is “an option to protect against the unknowns.” An SNT provides various benefits, among them:

  • Protecting your loved one with a disability by allowing them to still qualify for financial assistance.
  • Ensuring the funds go directly where you want.
  • Sheltering this money from creditors.
  • Protection from fraudsters

When to Set Up a Special Needs Trust

For many families, handling the financial requirements of a special needs child during their working years is doable. However, this task becomes more difficult once the parents retire and live on a fixed income. At the same time that parents must plan for their loved one’s future lifetime expenses and care, they also need to save for their own retirement.

In many families with special needs children, one parent either does not work or only works part-time because of the need to care for a disabled child. That makes saving for retirement even harder.

Parents of a special needs child should start making financial plans promptly, and professional planning is necessary. With good, solid planning, beginning as soon as possible, parents have a better chance of achieving a satisfactory retirement and a sound future for their child.

Of course, an SNT does not apply only to children. Older family members may also benefit from an SNT. For instance, an adult severely injured in a motor vehicle accident may no longer be able to care for themselves. The proceeds from a settlement may fund an SNT.

Special Needs Trust Example

To illustrate the importance of an SNT, let’s use this case study.

A young man was involved in an accident that left him physically and mentally disabled. He received a settlement for the injuries he sustained.

The settlement proceeds would have disqualified him from receiving government assistance until he spent down his balance to Medicaid qualifying levels. His attorney requested the court to establish an SNT to collect the proceeds of the settlement.

While the young man receives government program assistance, his SNT provides him with a personal vehicle, entertainment, leisure items, and other activities to make his life more enjoyable and financially secure. Without the trust, this young man would have been required to spend down his settlement proceeds until it was basically zero before once again qualifying for Medicaid and SSI.

Work With An Expert

SNTs can be complex, so working with a financial planner, estate planning attorney, and tax professional you can trust is critical if you want to pursue this route.

When naming a trustee for an SNT, remember the trustee must stay abreast of any government program changes and the effect of such changes upon the beneficiary. Because of the complexity, families often select a corporate trustee to help ensure the trust is administered properly.

Contact Us

For more information about a Special Needs Trust for your family member, contact Vice President of Wealth & Trust Steve Pietila at 605-665-4909.

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provides tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.