Starting a Special Needs Trust
A special needs trust (SNT) is a type of fund for disabled individuals. It allows parents, family members, or a caregiver to contribute funds to their special needs child without jeopardizing the child’s eligibility for programs like Medicaid or SSI in the future.
These programs place strict eligibility conditions on the beneficiary, requiring that recipients have no more than $2,000 in cash assets readily available. What’s more, monetary gifts, settlements, or inheritance money negate eligibility altogether.
The first thing you need to consider when establishing a trust is funding it, as the source of funding will determine its type. There are generally two types: first- and third-party trusts.
First-Party Special Needs Trusts
First-party special needs trusts are funded by the beneficiary’s assets. For example, if your child receives a substantial amount of money at any point, it will likely tip them over their $2,000 monthly limit and disqualify them from federal and state benefits. However, if they deposit the money into a first-party trust, it will not be attributed as an asset or income, allowing them to maintain their benefits and receive the payment.
If you’re interested in a first-party special needs trust, then you should be aware of your options. There are two types of first-party trusts: first-party stand-alone trusts and pooled special needs trusts.
First-party stand-alone trusts can be established by a parent, grandparent, guardian, or court. These trusts must be drafted by an attorney and approved by a court, which can be an expensive process. They also require a qualified trustee to manage the trust. If there is not a willing trustee present, then an institutional trustee is required.
Pooled special needs trusts are more flexible sub-trusts that the child can manage, if capable, along with other parties, such as a parent, grandparent, or guardian. Pooled special needs trusts are created and managed by non-profit organizations who combine your child’s assets with a master special needs trust. The funds are spent on children with special needs in proportion to their share of the trust, and do not interfere with your child’s eligibility for benefits. Most states have at least one pooled special needs trust option for families.
Third-Party Special Needs Trusts
Third-party special needs trusts are established by anyone other than your child. The trust is under the name of the grantor (the third-party creating the trust), who also owns any assets in the fund. These trusts are safe from creditors, and an appointed trustee (you or someone else) is free to invest the funds under a financial advisor. A big benefit of third-party trusts is that other family members and friends can freely contribute to the fund.
Funding the Trust
Funding your trust means transferring assets from your name to that of the trust. Once you’ve physically changed the titles of your assets, the money in the trust fund can only be accessed and managed by the trustee.
As you might imagine, funding a trust can be a costly endeavor, but it really depends on how much money you’d like to leave for your child in the fund. There are multiple ways to fund it: straight from your pocket or from various sources. For example, some families use their savings, while others actually name the trust as the beneficiary in their wills.
Other common methods include transferring profits from investments in stocks and mutual funds or the money accrued from an Individual Retirement Account (IRA). Of course, you should consult a financial expert first to determine the option that is best for you.