If you create a special needs trust for a loved one, you will probably fund the trust substantially after your death. You have several options for doing that, including a will, a living trust, and many kinds of beneficiary designations.
To learn more about special needs trusts generally, go the Special Needs Trusts section of Nolo.com.
CAUTION: See an expert if you want to fund a special needs trust during your lifetime. Unless there is a very specific reason to leave assets to a special needs trust while you are living, you shouldn't because doing so might have gift tax consequences. During your lifetime, you can use funds held in your name to take care of your loved one with special needs. So, it's almost always unnecessary to fund a special needs trust before you die. If you believe that you need to add money to the trust while you are living, you should consult with a tax attorney or CPA to fully understand any gift tax consequences.
The best-known estate planning document is the will (also called a "last will and testament.") A will is relatively simple to create, and you can use it to specify which property you want held in the special needs trust.
You can leave almost any kind of property in your will—bank accounts, houses, businesses, personal property of any description, or intellectual property (patents, copyrights, trademarks), to name a few examples. You can prepare a will yourself, or get help from a lawyer. You can change it or prepare a new one at any time.
One big downside to using a will is that your property might get held up in probate after your death. With a few exceptions (for example, many states have simplified probate rules for small estates), probate is likely to take many months and cost many thousands of dollars. This will cause a delay in funding the special needs trust and might reduce the sum available to your loved one. To avoid these problems, consider using a revocable living trust instead.
To learn much more about wills, including how to make one yourself, go to the Wills section of Nolo.com.
Like a will, a living trust can be used to fund a special needs trust that will become effective at your death. The trust document lists the trust property that should pass to the trust rather than directly to the beneficiary. A simple revocable living trust works much like a will does to distribute property after your death. But a trust offers one big advantage over a will: Trust property doesn't need to go through probate court proceedings.
Property that isn't held in your revocable living trust, or that hasn't been legally passed some other way, will pass under the terms of your will. It's precisely for this reason that most people with a living trust also make a will—to handle any property that hasn't been transferred to the living trust or left through some other means.
To learn much more about revocable living trusts, go to the Living Trusts section of Nolo.com.
You can also use beneficiary designations to leave assets to your special needs trust. You can name beneficiaries on many types of financial accounts, including:
The owner of the funds simply uses a form provided by the fund or securities manager to designate who gets the property upon the owner's death. Doing so ensures that the named beneficiary—a special needs trust, if you choose—will receive the property without probate.
In some states you can also use a "transfer on death deed," to transfer real property to a named beneficiary when you die, without probate. For more about this, go to Transfer-On-Death Deeds for Real Estate on Nolo.com.
When using beneficiary designations to fund a special needs trust, name the trust as the beneficiary—not your loved one. (Leaving property directly to loved ones will jeopardize their eligibility for Supplemental Security Income ("SSI") and Medicaid.)
CAUTION: See an estate planning attorney or tax professional if you want to make a special needs trust a "designated beneficiary" of your retirement plan. Although you can add a great benefit to the special needs trust if you make the trust a "designated beneficiary" of an IRA, the trust must meet some specific rules.
Your loved one might come into some property—perhaps a personal injury settlement or an inheritance from a relative. At first thought, it might seem like a good idea to put that money straight into the existing special needs trust, to keep it from being counted as the beneficiary's resource and disqualifying the beneficiary from getting SSI. Bad idea. In fact, adding the beneficiary's own property to the special needs trust could make your loved one ineligible for SSI and Medicaid. That's because if the beneficiary's own property is mixed with the property you left in the special needs trust, it could all be considered the beneficiary's resource. And if the total amount exceeds the resource limit ($2,000 in 2024), the beneficiary would become ineligible for benefits.
A better alternative than adding property to a third-party trust is to create a separate first-party special needs trust. That way, assets in the original trust will remain off-limits as a resource, and eligibility for SSI and Medicaid won't be affected.
Read more about first-party special needs trusts in Special Needs Trust: First-Party vs. Third- Party Trusts.
Excerpted from Special Needs Trusts, by Steven Elias and Kevin Urbatsch (Nolo).