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.
When selecting an account for your trust’s assets, weigh several factors that include:
There are three main types of special needs trusts that are designed to protect the assets of a person with special needs, yet differ in how they are funded.
- Third-party special needs trust.This type of trust is funded with your own assets and allows you to leave an inheritance such as life insurance, real estate or retirement accounts to loved ones with special needs.
- First-party special needs trust.This type of trust is funded with assets belonging to the person with special needs, instead of your own assets.
- Pooled trust.A pooled trust is set up by a non-profit that pools together resources from multiple families. The non-profit selects a trustee to administer the funds of each beneficiary’s individual account and typically offers additional management services.
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 | $2,000–$3,000 | $300–$600 |
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| When assets can be used | Immediately | After you die |
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| Specialized lawyer required? | Sometimes | No |
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| Potential fees | Annual trustee fee | Estate taxes |
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| Potential loss of government benefits? | No | Yes |
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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.
Bottom line
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
