Special Needs Trusts—The Basics

If you want to leave money or property to a loved one with a disability, you must plan carefully. Otherwise, you could jeopardize your loved one's ability to receive Supplemental Security Income (SSI) and Medicaid benefits. By setting up a special needs trust (sometimes called a "supplemental needs trust") in your will, you can avoid some of these problems.

Owning a house, a car, furnishings, and normal personal effects does not affect eligibility for SSI or Medicaid. But other assets, including cash in the bank, will. For example, if you leave your loved one $10,000 in cash, that gift would disqualify your loved one from receiving SSI or Medicaid.

What Is a Special Needs Trust?

A special needs trust is a trust that holds funds for your loved one but does not impact your loved one's financial eligibility for government programs. If you have loved ones with special needs, you can use a special needs trust to leave behind money that will improve their quality of life. That is, instead of leaving property directly to your loved one, you would leave it to the special needs trust.

The money in the special needs trust is managed by a trustee, and is not considered to be part of your loved one's assets when calculating their financial eligibility for government programs like SSI and Medicaid.

Learn more about Who Can Benefit from a Special Needs Trust.

The trust ends when it is no longer needed—commonly, at the beneficiary's death or when the trust funds have all been spent.

If you're looking to set up a special needs trust, learn more about How Special Needs Trusts Work.

Special Needs Trust Rules: How the Money Can Be Spent

The trustee cannot give money directly to your loved one—that could interfere with eligibility for SSI and Medicaid. But the trustee can spend trust assets to buy a wide variety of goods and services for your loved one. Special needs trust funds are commonly used to pay for personal care attendants, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles, and physical rehabilitation.

Learn more about How Special Needs Trust Funds Can Be Used.

When Should You Consider Pooled Special Needs Trusts?

If you can't come up with a good candidate to serve as a trustee or are leaving a relatively modest sum and don't want to set up a separate special needs trust, consider a "pooled trust." These are special needs trusts run by nonprofit organizations that pool and invest funds from many families. Each trust beneficiary has a separate account, and the trustee chosen by the nonprofit spends money on behalf of each beneficiary. Pooled trusts (also called community trusts) are available in many areas of the country.

Learn more about Special Needs Pooled Trusts.

How Much Money Should You Leave in a Special Needs Trust?

If your loved one with a disability is the only person you want to provide for after your death, then you'll probably want to put your entire estate into your special needs trust and hope it lasts as long as your loved one needs help.

Many people, however, want to leave money not just to a loved one with a disability, but also to others. Or you may have more money than you think your loved one will ever need. In those situations, you'll need to consider:

• Your family. Do you want to divvy your property up evenly or leave a larger share to the special needs trust, on the theory that your other loved ones can take care of themselves? There are no easy answers, but talking with family members may help you reach a conclusion you feel good about.
• Your life insurance. Many parents of children with disabilities obtain life insurance. This approach lets you leave a sizable sum to the special needs trust under the life insurance policy and still provide for your other family members out of your other property.
• Your loved one's life expectancy. Grim as it is, you'll have to take your loved one's life expectancy into account when deciding how much property to leave to the special needs trust. To state the obvious, if your loved one's life expectancy is short, then the trust will need less money than if it were long.
• Your loved one's needs. Although it involves some guesswork, you need to think about what you want the trust funds to supply for your loved one, and how much money that will take.

So, how should you juggle all of these factors so that you come out with the right funding for your special needs trust? The short answer is, it's almost impossible to come up with meaningful numbers without the right calculators, and expertise, at your fingertips. Consider getting help from a professional. Here are three companies that have created departments specially designed to assist in financial planning for persons with disabilities:

• MassMutual Financial Group's SpecialCare program,
• Merrill Lynch & Co., which has set up a program that focuses on financial planning for special needs families, and
• MetLife Inc., which has also created a special needs unit to help families design financial plans.

You can also get help from certified financial planners.

To learn more about special needs trusts, go to Nolo's Special Needs Trusts section.

Will You Need a Lawyer to Make a Special Needs Trust?

Some lawyers will tell you that only an attorney can draft a special needs trust. But you can create a special needs trust yourself, with the right guidance.

Of course, there are times when you should seek an attorney's advice. For example, you must see a lawyer if you want to create a trust that will be funded with the beneficiary's own money (for example, a settlement from a personal injury lawsuit), rather than your money. Complicated and state-specific rules apply to these kinds of trusts.

The book Special Needs Trusts: Protect Your Childs Financial Future, by Kevin Urbatsch (Nolo), explains when you should seek an attorney's advice to set up a special needs trust. If you determine that you don't need a lawyer, you can use the book's forms and plain-English instructions to set up your own special needs trust.

Are There Other Options Besides Special Needs Trusts?

While special needs trusts can be very helpful, they're not for everyone. You can also explore alternatives to special needs trusts, such as:

• Leaving money directly to your loved one with special needs
• Leaving money directly to another family member whom you trust to help your loved one, and
• Establishing an ABLE account.