Estate Planning: 4 Questions to Ask When Setting Up a Special Needs Trust

Are you a parent looking for a fair way of providing for your children and dependents? This task is hard if you have a child with special needs. Such a child has ongoing care-giving needs that have to be taken care of. How can you have this child’s needs met after you die? Setting up a separate fund called a Special Needs Trust is one way to address this. 

A Special Needs Trust is a legal entity that enables assets to be held for your child’s care. Such a trust minimizes the assets held by the child and makes the child eligible for government benefits such as Supplemental Security Income and Medicaid. Strict rules apply regarding the purpose of using trust funds. 

1. What is the difference between a will and a Special Needs Trust?

While wills and trusts help with managing your assets, one important difference is their timing. A will becomes effective upon your death. You can set up and fund a Special Needs Trust while you are living or specify its establishment in your will. 

The costs involved have also to be considered. Because of its more complex nature, a Special Needs Trust is more expensive to set up than a will. 

2. How does a Special Needs Trust work?

There are usually three parties in a Special Needs Trust- a trustor or grantor providing funds, a trustee, and the beneficiary. Based on circumstances, a trust can be a first-party, third-party, or pooled entity. The three types of trusts differ in how they are funded.

In a first-party trust, the beneficiary is also the owner of the assets. These assets can be an inheritance or compensation for a personal injury. The beneficiary has to be less than 65 years at the formation of the trust. Once the beneficiary dies, any funds remaining in the trust are used to reimburse Medicaid before being released to others.

Parents, relatives, and friends can contribute to a third party trust. Upon the death of the person with special needs, any funds remaining in the trust may be distributed to named beneficiaries. 

In a pooled Special Needs Trust, a non-profit corporation manages funds from different sources on behalf of many beneficiaries. On the death of a beneficiary, Medicaid and the corporation share the remaining funds contributed on behalf of that person. A pooled trust may be suitable if the estate is small and there is difficulty in finding a trustee.  

The trustee is responsible for investing funds held in trust, keeping records, deciding whether to release funds when there are requests from the beneficiary, and for any tax filings. The trustee has to be fair and firm with the beneficiary while carrying out this fiduciary role.  

As with any other legal process, drafting, signing, and notarizing a Special Needs Trust is a requirement for it to be effective. Thereafter, a bank account in the trust’s name has to be opened for the deposit and release of funds. 

3. What factors are important when setting up a Special Needs Trust?

Give due consideration when selecting a trustee. If the trust becomes functional while you are alive, you can be the trustee. Alternatively, a family member or professional organization may assume this role. The trust documents should include directions about successor trustees and replacing trustees. 

It is important to form a trust to minimize fees and taxes. While a fund can hold many types of assets, the type of income earned can affect what tax is payable by the beneficiary versus the trust. Also, recent changes to tax laws have restricted some advantages previously accorded to trusts.

Special Needs Trusts are one of the trusts exempted from these rules. This exemption allows your special needs child to withdraw funds from an inherited Individual Retirement Account (IRA) held in the trust over his lifetime rather than over the applicable minimum period of ten years. To become eligible for this concession, your child has to be “chronically ill” or “disabled” as defined in the tax codes which may be difficult to prove.

Consider what assets go into a trust and what impact they will have when withdrawn. Tax-efficient assets and those that have no withdrawals limits such as life insurance policies are safe choices. 

4. Where can a parent find more information about Special Needs Trusts?

While you can set up a Special Needs Trust on your own, it may be beneficial to get expert help from persons knowledgeable in estate planning and trusts. Decide whether the cost of getting expert help makes sense in relation to the value of assets in the trust.

There are many informative articles online relating to Special Needs Trusts. The Special Needs Alliance (www.specialneedsalliance.org/) offers useful information about these trusts. Use this site’s “Find an attorney” tab to locate a professional in your area. 

Decide on what is best for your children and family members

Estate planning is about deciding how to distribute your assets among your beneficiaries. While providing for a child with special needs is an important consideration, your concerns about providing for other family members have also to be borne in mind. This task can be overwhelming because of the emotional element, uncertainty, and family dynamics at play. However, by reviewing your options and getting expert help, you can work out a satisfactory way to manage your assets.