Protecting your greatest assets: Your family.© Halfpoint/stock.adobe.comIf you are caring for a family member with special needs or facing a diagnosis that may require special care, your responsibilities extend beyond today’s needs. Establishing a plan now will help ensure access to resources, care, and financial stability even as circumstances change. 

　　Estate planning isn’t just for wealthy people—it’s essential for most families. And if there’s a special-needs member in your family, establishing clear plans and directives takes on a new level of importance. Such a plan might include a special needs trust (SNT). An SNT can help your family member, dependent adult, or child take advantage of government assistance while preserving the estate’s assets for when they might be needed later in life.

　　What is a special needs trust (SNT)?A special needs trust holds assets for the benefit of someone with disabilities. It’s typically a type of irrevocable trust. The trust is managed by a designated trustee, who is responsible for disbursing money from the fund in a way that doesn’t affect the recipient’s eligibility to receive government assistance.

　　Special needs trusts may be one of three types: first party, third party, or pooled. First-party SNTs are funded directly by the beneficiary, while third-party SNTs are funded with assets from others, such as friends and family.

　　Pooled special needs trusts are more complex and typically managed by a professional trustee, often a nonprofit organization. The trustee aggregates funds for multiple beneficiaries into a pool that’s managed collectively, although each beneficiary retains a separate subaccount.

　　The main purpose of an SNT is to provide financial support to a person with disabilities while preserving their eligibility for Medicaid, Supplemental Security Income (SSI), or other needs-based government programs. The funds in a special needs trust may be used only for “qualified” expenses that aren’t already covered by government assistance.

　　Health care not covered by Medicaid or Medicare Personal care assistants Electronics Clothing Travel Home appliances School tuition Entertainment  FurnitureEstate planning for loved ones can be overwhelming, especially when it comes to those with special needs. Understanding how to establish a special needs trust can help you feel more confident about the process. Here are eight steps to take.

　　1. Determine the right type of special needs trustFirst, select the type of special needs trust that’s most appropriate. For example, you’ll need to choose between an individual or pooled special needs trust. Your choice depends on these key factors:

　　The size of your estate. An individual SNT is typically more suitable for a large estate, which can likely bear higher administrative costs.Your budget for estate planning and trust maintenance. Establishing an individual SNT can cost thousands of dollars, and maintenance of the trust is an ongoing expense. Pooled SNTs are often significantly more affordable.Your customization needs. Individual SNTs provide the most ability to customize the trust to meet your needs and those of your loved ones. Care providers and beneficiaries in pooled trusts receive a more standardized type of service.2. Choose a trusteeIf you’re forming an individual SNT (rather than pooled), your next move is to select a trustee to manage the fund. The trustee may be a family member, friend, professional (such as a lawyer), or a nonprofit organization.

　　3. Draft the trust documentAfter you’ve selected your trustee, you’re ready to draft the trust document. A lawyer specializing in estate planning can assist with creating this legal filing, which identifies the trustee and defines the purpose of the trust and how it will be managed.

　　4. Fund the trustWith the SNT legally established, you’re ready to make your first deposit—an important milestone. A special needs trust may receive various assets, including cash, stocks, bonds, real estate, and insurance proceeds. For many families, the process of funding a special needs trust is ongoing for years or decades.

　　5. Request funds as neededThe beneficiary or their legal guardian is empowered to request financial support from the trust as needed. Written requests, while perhaps burdensome, must be submitted to pay for specific expenses.

　　6. Distribute funds for qualified expensesUpon receiving a distribution request, the trustee reviews the request to determine if the expense is qualified. The trustee pays for a qualified expense by disbursing funds directly to a retailer, service provider, or other third party. 

　　7. Monitor and keep detailed recordsAmong the numerous responsibilities of the trustee are monitoring the SNT and maintaining detailed records. For compliance and auditing purposes, every disbursement is recorded along with the details of the qualified expense.

　　Trustees may also periodically review the trust’s performance, focusing on investment returns. The trustee assesses how that performance aligns with the beneficiary’s needs and any changes to their government benefits.

　　8. Distribute any remaining assetsAfter the beneficiary’s death, any remaining funds in the special needs trust are distributed.

　　For first-party SNTs, those funds typically must reimburse Medicaid for services provided to the beneficiary. (Yes, Medicaid keeps a running total of all monies paid over the recipient’s lifetime.) Any funds remaining are distributed to a contingent beneficiary. For funds in third-party SNTs, contingent beneficiaries (as specified in the trust document) are the sole recipients.The SNT is generally considered dissolved after all assets are distributed and no further financial obligations remain. When complex assets are involved, the trustee may take formal steps to close the trust, such as by notifying the appropriate parties or preparing a final accounting statement.

　　Who is eligible for a special needs trust?You may be wondering if your family can even use an SNT. Regardless of the type of special needs trust, the eligibility criteria for the beneficiary is much the same. The beneficiary must be a person with a disability as defined by Social Security Administration (SSA) criteria. This generally means that a physical or mental impairment significantly limits the beneficiary’s ability to work or carry out daily activities.

　　For adults, the SSA requires that a medically determinable physical or mental disability has lasted (or is expected to last) for a continuous period of at least 12 months, or is expected to result in their death. The impairment must prevent the beneficiary from engaging in any “substantial gainful activity,” meaning work.For children, the SSA also requires that a medically determinable physical or mental disability has lasted (or is expected to last) for a continuous period of at least 12 months, or is expected to result in death. The impairment must result in marked and severe functional limitations for the beneficiary.Download pdfFirst-party special needs trusts may be created only for individuals who are under age 65 when the trust is established. Third-party special needs trusts and pooled trusts are not associated with any age restrictions.

　　Mistakes to avoid when managing a special needs trustYou may be familiar with means testing, the process of determining a disabled individual’s eligibility for SSI, Medicaid, or other government benefits based on the resources available to them.

　　Distribute cash directly to the beneficiaryPay for food, shelter, or other basic needs already funded by government programsStructure a first-party SNT as revocableExclude a Medicaid payback provision from a first-party trustBypass the trustee to provide the beneficiary with direct access to the SNT’s fundsThe bottom lineEstablishing a special needs trust typically requires a lawyer; the support of family members is also beneficial. It can be challenging to provide for a disabled loved one after a parent or guardian dies, especially if other family members have concerns about how the estate is divided.

　　Choosing the right type of special needs trust is a solid first step—one that can be bolstered by clear, open communication with everyone involved.

　　ReferencesHow Do We Define Disability? | ssa.govChildhood Disability: Supplemental Security Income Program | ssa.govSpecial Needs Trusts: A Parent’s Guide | specialneedsplanning.com