Special Needs Trusts 101: Understanding the Basics
If you are the parent of a loved one with a disability, ensuring your child is taken care of when you’re no longer around is critical – and leaving money for their care is a big piece of the puzzle. Many families of children with disabilities turn to trusts, specifically Special Needs Trusts (SNTs), as a way to set aside money after they are gone. Here are some of the basics you need to know if you are thinking about establishing an SNT:
What is a Special Needs Trust?
An SNT is a type of specialized trust designed to enable a person with a disability to receive distributions from a trust while helping to preserve access to public benefits such as Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), HUD/Section 8 subsidies, Medicare, and/or Medicaid.
Who is eligible for a Special Needs Trust?
To qualify for an SNT, the individual receiving the funds – called the “beneficiary” – must have a disability recognized by section 1614(a)(3) of the Social Security Act. This resource provides a complete list of recognized disabilities for adults and children.
Is a Special Needs Trust necessary?
Government programs like Medicaid and SSI provide for the essentials, such as medical care, food, and shelter, but resources are limited and designed only to cover basic necessities. SNTs are designed to supplement this foundational support, not replace it – this is why Special Needs Trusts have also been referred to as “Supplemental Needs Trusts” (you may also see them called “Disability Trusts”). Families often set up an SNT to help the child cover the costs of care, live more comfortably, and explore their interests beyond what government benefits can provide.
What can a Special Needs Trust be used for?
SNTs typically pay for things like education, recreation, counseling, transportation, and medical attention beyond the simple necessities of life. Here are some specific examples of expenses that trust funds may cover:
- Medical and dental expenses not covered by public benefits
- Special equipment like wheelchairs or specially-equipped vans not covered by public benefits
- Training and education
- Travel, which can include the cost of a companion in some cases
- Car payments, bus passes, or ride share fees
- Recreation and entertainment (summer camp, movies or social events, sports equipment)
- Computers and other electronic equipment
- Legal or guardianship expenses
What can a Special Needs Trust NOT be used for?
Equally important to knowing what an SNT can be used for, is understanding what trusts should avoid paying for to help preserve public benefits. Since Supplemental Security Income (SSI) is meant to cover food and shelter expenses, SNT funds used for those purposes may be considered “in-kind support and maintenance (ISM)” and may reduce SSI payments, which, in turn, may impact Medicaid benefits, housing subsidies, and more. If you want to help your child cover costs related to housing (e.g. mortgage payments, property tax, rent, utilities, etc.) or food, you may want to consider an ABLE Account for these expenses. (Note: beneficiaries can have both an SNT and an ABLE Account)
How do I establish a Special Needs Trust?
Working with an attorney is often the first step in establishing an SNT. Professionals with experience in Elder Law, estate planning, and Special Needs Trusts have experience drafting language that can help ensure benefits are preserved and trust funds will be used in the way you, and your child, want them to be. When establishing the trust you will need to name a trustee – this is the person responsible for administering the trust, making decisions about whether to approve distributions of the funds, etc. This could be a family member or a professional trustee, or a Pooled Special Needs Trust.
How can I fund a Special Needs Trust?
You don’t have to be wealthy to establish and fund an SNT; these trusts can be funded with cash, securities or other resources. Life insurance policies (specifically a second-to-die or survivorship policy) often offer the most affordable option, enabling a family to fund an SNT without depleting funds needed for other household needs. If assets in an Individual Retirement Account (IRA) represent a large portion of your estate, it’s important to work with professionals who understand how to maximize inherited IRAs for SNT beneficiaries.
Others can also contribute to an SNT once it’s been established. Grandparents and those interested in helping your child can also make annual gifts to the SNT of up to $16,000 (as of 2022) without triggering gift tax reporting requirements.
For any family who has a child with disabilities, SNTs are a great option to consider during the estate planning process. Once you have a basic understanding of the pros and cons of these trusts, it’s a good idea to reach out to a special needs planner or attorney who can help you make the right plan for your family's specific situation.