A large part of planning for your child’s future is ensuring they’re able to access the resources they need to thrive. Starting a special or supplemental needs trust is one way you can proactively plan for the years ahead.
We take a look at the benefits and potential drawbacks of this popular savings option for children who have special needs.
What is a special-needs trust?
A special-needs trust is a form of a financial trust. It is a fiduciary relationship whereby one party manages the finances or property of another party for the benefit of a third — in this case, for the benefit of a person with special needs. Generally, a trustor or guarantor sets up the trust, while a trustee manages the trust’s assets for the beneficiary.
This specific trust helps a person with special needs access the financial resources to pay for care or services and maintain quality of life. Specifically, this kind of trust can ensure that its beneficiary remains eligible for government programs like Supplemental Security Income (SSI) and Medicaid, regardless of the assets in that trust.
How to establish a special-needs trust
Choose a trustee. Your trustee should be a person you’re sure you can rely on to manage the future assets of the trust.
Draft your trust. The trust document sets out the terms of the trust, establishing the grantor, the trustee, the beneficiary and the assets of the trust. You can draw up this document yourself or go through specialized lawyers with expertise in the field.
Sign and notarize your trust document. Your trust is not effective until after it’s signed by all parties and notarized.
Open a trust account. Before you can fund your trust, you must establish a bank account in the trust’s name. Open an account at a bank or brokerage using the name and tax ID number for your trust received from the IRS.
Fund the trust account. Anyone other than the beneficiary themselves can deposit funds or financial assets into the trust account. Assets can include property, stocks, patents, jewelry and money.
What should I watch out for?
As with all financial products, a special-needs trust comes with potential drawbacks.
While you can draft your trust document yourself, the process is complicated and takes time. Many people rely on the advice and expertise of a lawyer for peace of mind, but it can add to an already costly process.
Also, when considering trustees for your trust, make sure they fully understand the responsibilities involved. A trustee manages the assets of the trust, maintaining accurate records and filing any necessary tax documents on behalf of the trust while also responding to the beneficiary’s needs. Your trustee should be reliable, responsible and up to the task.
Ask an expert: Can my child qualify for government assistance with a special-needs trust?
Special trusts are in place to protect people, as are life insurance policies. And while they can work together, factors could affect your existing financial support if you’re not careful.
As of 1993, when the Omnibus Reconciliation Act took place, trusts could be categorized as income — meaning their existence could jeopardize access to government services that are integral to the life of a special needs child and their family. If you are setting up a special trust, whether funded by a life insurance policy or not, be sure to include the following terms:
Your trust must be limited to one — and only one — lifetime beneficiary.
Your trust must be solid and irrevocable.
The trust can only pay for medical services that are not paid for by other sources.
With these specifications in place, you may be able to qualify for an exemption.
How to compare trust accounts
When selecting an account for your trust’s assets, weigh several factors that include:
Account type. The most advantageous account depends on how much you intend to deposit and how your trust is managed. For an actively managed account, an investment account might offer the highest potential for growth. Or consider a high-yield savings account.
Minimum balance. Read the fine print to make sure you can meet the minimum balance of any account you’re considering. Some savings accounts ding you with monthly maintenance fees if you fail to maintain the minimum required.
Account fees.> Fees can gnaw away at the savings you’ve set aside for your child’s future. Monthly fees can be fixed or a percentage of your account’s assets. Still others waive fees if you keep enough money in the account.
APY. If you select a savings account for your trust’s assets, know how much interest you stand to earn. The higher the APY, the better the opportunity for your funds to grow over time.
Do I need a lawyer?
While a lawyer isn’t required to draft a trust document, legal expertise and guidance might benefit the process of creating your trust.
A factor in deciding whether to hire a lawyer is the amount of money you intend to put into your trust. Trust lawyers can be expensive, some charging in excess of $5,000 for their services. If the assets you wish to deposit exceed the legal fees of creating the trust, then a lawyer could be a good option.
What happens after I establish a trust?
After you’ve successfully opened a special-needs trust, you can begin contributing funds and assets to the account.
Many forms of financial assets can be contributed to the account, including stocks, mutual funds, CDs, IRAs, property — and, of course, cash.
It’s not just family members or relatives of the beneficiary who can contribute to the account. Anyone with an interest in helping out your loved one with special needs is welcome.
Contributing to a trust requires asking the trustee for a document or form on which the person can designate the assets they’d like to contribute.
How does my beneficiary access their special-needs trust?
The beneficiary of a special-needs trust can’t directly access the funds of their trust — that’s the trustee’s job.
The trustee is responsible for managing the assets of the trust, which includes allocating funds to the beneficiary when needed. The beneficiary can request funds from the trustee, and it’s ultimately the trustee’s decision as to whether those funds are released. Careful management of a trust’s funds is a big responsibility, and it can be challenging for a trustee family member to say no to a beneficiary’s request. In these instances, you might want to appoint a professional trustee to manage your special-needs trust. Professional trustees are trained in the management of trust assets and can objectively decide whether to grant a request of funds for the beneficiary.
What happens when I’m no longer here to manage the trust for my child?
When you create a special-needs trust, you name a trustee in charge of managing the assets of the account. Some parents elect to name themselves trustee of the account so they can personally oversee their child’s funds while they can.
If you are the trustee of your child’s account, you can rest easy knowing that your child will continue to have access to the trust’s funds even after you die. You’ll establish a successor trustee to manage the account after your death. This successor can be a friend or family member, or you can hire a bank or other professional trustee to manage your child’s trust in your absence.
You can guarantee a successor trustee by including a provision in your trust. Some trusts require that you name your successor when drawing up the trust, but you can write an amendment that designates a successor after the trust has been written. Keep in mind that amendments must be signed by all parties in front of a notary public.
What’s the difference between a will and a trust?
One of the leading factors that separate a will from a trust is timing. A living trust goes into effect immediately after it’s created, while a will becomes effective only after you’ve passed away.
Wills and trusts are tools that can help you manage your financial assets and resources, but they require different upfront and long-term costs and offer different degrees of control in how your assets are allocated.
The upfront costs associated with setting up a trust can be higher than those for a will. Estimates suggest that you need $2,000 to $3,000 to create a special-needs trust, compared to the $300 to $600 average cost of creating a will.
While a special-needs trust safeguards your child’s eligibility for government services and programs, a will does not. With a will, if your beneficiary’s assets rise above a $2,000 eligibility threshold, that person could potentially lose SSI, Medicaid and other government benefits. Estate taxes could also kick in if your estate exceeds the current tax threshold.
A dedicated savings option for your child, such as a special-needs trust or savings account, is a practical choice. And it doesn’t rule out the possibility to establish a will in preparation of your passing.
Wills vs. trusts: How do they compare?
This high-level comparison can help you determine what to expect against your specific situation.
Cost to open
When assets can be used
After you die
Specialized lawyer required?
Annual trustee fee
Potential loss of government benefits?
Should I consider a pooled trust?
A pooled trust is a trust established and maintained by a nonprofit organization. Such a trust pools the resources and assets of beneficiaries who join the trust, which can minimize administrative costs.
An advantage of joining a pooled trust is that you don’t have to draft a new special-needs trust on your own. Rather, the beneficiary or legal guardian simply signs an agreement to the trust’s membership terms.
Pooled trusts can be a practical choice for lower-income families, helping them to avoid the expenses and time that come with establishing a separate trust.
But not all pooled trusts are the same. Fee schedules, administrative protocol and asset management can differ among organizations.
Taking proactive measures to secure a stable future for your child is no small undertaking. A special-needs trust is a cost-effective savings option that can offer and protect the resources to support your child’s future needs.
But setting up a special-needs trust can be expensive and takes time. While not required, a lawyer can provide peace of mind, guiding you to your specific goals and helping to plan and draft your trust documents.
Frequently asked questions
These are some of the most frequently asked questions about this topic. If you still have questions, please get in touch with us.
It depends on your specific circumstances. A typical trust could jeopardize your beneficiary’s access to government programs, like SSI and Medicaid, if its assets reach $2,000 or more. A special-needs trust can protect your assets while also maintaining access to government assistance.
Yes. You must file a tax return for the trust annually using IRS Form 1041 — US Income Tax Return for Estates and Trusts.
Yes, but the process depends on the trust document. Some documents include clear provisions as to how a trustee can resign their position for a successor trustee to take over. For those that don’t, you might need the court to appoint a successor.
Talk with a lawyer that specializes in trusts to learn your options.
Shannon Terrell is a writer for finder.com who studied communications and English literature at the University of Toronto. On any given day, you can find her researching everything from equine financing to merchant account providers. She loves hot coffee, the smell of fresh books and discovering new ways to save her pennies.
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