SPECIAL NEEDS PLANNING: Providing for a child with special needs using a special needs trust

By Vivian J. Villers, CFP, AIF, CWS

If your child with special needs is receiving government benefits such as SSI and Medicaid, they cannot have more than $2000 in their name before those benefits are jeopardized*. In most cases, government benefits do not adequately provide for their needs. There are three ways to provide supplemental funds for the current and future support of a child with a disability:

  • Special Needs Trust
  • “Payback” or OBRA’93 Trusts
  • ABLE Account

This month, I want to cover the Special Needs Trust (SNT).

An SNT is sometimes referred to as a “third-party trust” because the trust is originated and funded by a third party (parents, grandparents, siblings, etc.) and not the disabled individual. This is NOT the child’s money, but are assets originally owned by someone else. Thus, assets held inside an SNT are excluded when determining eligibility for SSI and Medicaid.

The SNT is a legal document, drafted by an attorney, preferably one with special needs expertise. Usually, the parents are the original trustees. Trustees manage the assets in the trust and the withdrawal of funds to provide care and support for the child. Distribution of funds should not go to the child with a disability; rather, they are used to directly purchase goods and services needed by that individual. There are also successor trustees named to step in after the death or incapacity of the parents, and contingent beneficiaries named to inherit if the person with a disability dies with assets remaining. These are usually other family members.

Sometimes, a will or other legal document will state that an SNT is to be established “testamentary,” AFTER the parents are deceased. My recommendation with clients is to create the SNT now, as a free-standing, separate document. Here is why:

  • If the trust is already in place, it allows for current gifting. Perhaps a grandparent or aunt might want to gift investments or leave assets as an inheritance. If the SNT does not exist, there is no entity to receive such gifts or name as a proper beneficiary.
  • Assets placed in the trust now can grow. Those assets could also be accessed for current needs of the child, such a living expenses or additional medical costs.
  • Family members – grandparents, parents, etc. – can name the SNT today, as a direct beneficiary of assets such as life insurance or retirement accounts.
  • In the future, the government may change the exclusion of assets held in an SNT. If an SNT already exists, the exclusion might continue to be “grandfathered” or allowed, but a trust not yet established would lose that luxury.

Once the trust is established, be sure to notify all family members and provide exact wording to be used for beneficiary designations and lifetime gifting.

Do it now. Your next crisis is not on your calendar!

*An exception is the ABLE Account, to be discussed in a future article.

Vivian J. Villers is a long-time Sigma Financial representative. For over 20 years, she has provided financial planning advice for families and individuals with special needs. Vivian serves on the Board of Directors of The Arc of Illinois and has two family members with disabilities. She is a Certified Financial Planner, focuses much of her practice on special needs, financial planning, and frequently speaks on the topics of both families and professionals. 

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