Wednesday, June 20, 2012

Trusts for kids with special needs: what to know, what to do

What is a special needs trust? I didn't find out until years after Max was born. One of the hardest parts of planning for your child’s financial future is accepting that you need to plan. Dave and I procrastinated, both because we were overwhelmed with Max's day-to-day care and because, if I’m being honest, we were in denial. I felt a little reassured to hear that the financial planner I’ve been working with on this series of sponsored posts also didn't jump right on it. “I didn’t do financial planning till my daughter was 12—I was just worrying about taking care of her,” says Sal Salvo, a SpecialCare Planner with Summit Marketing Inc., a general agency of Massachusetts Mutual Life Insurance Company (MassMutual).

During our most recent session, we discussed a special needs trust. I basically knew what it is but I still had a whole lot of questions. I got the complete run-down—and I'm sharing it with you. 

What exactly is a special needs trust?  
It's a way of making sure a child is eligible for all possible government benefits. According to current laws, if a child with disabilities who turns 18 has more than $2000 in their name, they won't qualify to receive certain benefits from the government. That includes Social Security Income (SSI) and Medicaid benefits such as a home health aide, therapy, work programs, daycare programs and respite programs. Parents create a “trust”—a legal way to hold assets for the benefit of another—to put money in so that their child will not have assets over $2000 in their name, and still qualify for those government benefits. For more info about SSI and Medicaid (MediCAL in California), visit the sites for Supplemental Security Income (SSI) and the U.S. Department of Health & Human Services. Medicaid rules vary by state, so it's good to check the federal site for info. You can also reach SSI at (800) 772-1213.

What don’t people get about special needs trusts?
I don’t think people understand how important they are! Without a special needs trust, any inheritance left to a child with special needs may disqualify that child for government benefits.   

What types of special needs trusts exist?
There are two main types of special needs trusts. The most common is a third party special needs trust or a supplemental care special needs trust. That trust is designed so that other people’s assets can be put into the trust—money from parents, grandparents, aunts, uncles and siblings. This allows family to provide supplemental care for a child with special needs, without jepordizing government support. The money can go toward clothing, vacations, hobbies, furnishings and transportation and augmentative communication equipment, but not room and board. These are all things that can improve the child’s lifestyle without losing potential government support. With this kind of trust, no monies need to be paid back to the government. 

The second type of trust is a payback trust, which is less common. It is also known as a self-funded pooled disability trust. This is for a child who has assets, such as an inheritance, a settlement from a lawsuit, or even grandparents who set up a college savings plan. With this trust, the government keeps track of SSI and Medicaid benefits given to the child. When the child passes, the government presents a bill to the family to pay it back and the trust covers those costs. If there’s anything left, the money can go to the rest of the family.

Is there anything else a trust can pay for?
There are pretty tight rules but one major thing is that parents can pool resources and purchase a home for their children with special needs. 

At what age should I start planning a special needs trust for my child?
From an economic point of view, a trust for a child with special needs should be done as soon as possible. The bottom line is, a child with disabilities needs one in place by 18. By setting up a trust early (even if you don't fund it for a while), you can let grandparents or other relatives know in the event they plan to leave an inheritance. It must be paid directly to the trust, rather than put in the child's name. If by chance they pass away and leave your child money in his name, you'd have to do a payback trust (which is isn’t as attractive). So you want to get going on one early on.
How do you set up a special needs trust?
First, you should ideally have a total plan in place for your child that you will have worked on with a professional familiar with planning for someone with special needs. To set up the trust, you need to hire an attorney who specializes in special needs estate planning; they’ll know how to do it so your child doesn’t forfeit any benefits. A lot of people think an attorney can do anything, but think of it this way: If you need open-heart surgery, you’re not not going to a podiatrist! You need a special needs attorney. This attorney can also check to make sure that your child's assets are protected—for instance, that your 401k or pension does not list your child with special needs. Some additional resources: The Academy of Special Needs Planners and The Special Needs Alliance.

Who handles the investments for a special needs trust?
You will need to choose a trustee no matter what type of trust you have, someone who manages trust assets. A corporate trustee, such as a bank or trust company, can best handle this. The trust should be invested in a diversified manner, and with an investment strategy that generates a good rate of return. Some parents think it's a good idea to choose a family member to be trustee, but in some places the law forbids that and a family member might not be best equipped to handle this. Does Uncle Joe really know how to manage money and file trust tax forms, or is he better focused on caring for your child? You should, however, inform grandparents and relatives about the trust so that if they were considering leaving money to a child with special needs, they can leave it specifically to the Special Needs Trust.

This is one of a series of posts sponsored by MassMutual, for which I received compensation. SpecialCare is an exclusive MassMutual program that provides access to information, specialists and financial products and services.

Disclaimer from MassMutual: The information provided is not written or intended as specific tax or legal advice, and may not be relied upon for the purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel.



  1. $2000 is not very much money by today's standards -- especially for caring for someone with special needs. Probably a good thing that you are letting people know!

  2. Just FYI in most states attorney are not by law allowed to say that they "specialize" in any area of the law. So what you would be looking for is an attorney who "concentrates" his or her practice in Special Needs Estate Planning. And you are right, Ellen, it really does make sense to deal with an attorney who has experience dealing with special needs trusts.

  3. Ok, I didn't know you were a mind reader on top of all the other amazing qualities you possess! Just yesterday my parents said that they spoke with their investment counselor about setting up a special needs trust for our son. Along with being extremely grateful I was filled with panic because back in the recesses of my mind I knew it had to be done a certain way to retain Paolo's government benefits as well. I had just added it to my "to do" list to investigate this further and then "viola" my questions were answered by you! Thanks a ton, you made my day and I was able to cross this off my list:)

  4. Wow what a great post, I had no idea there was even a thing called a special needs trust.Good to know.Thanks Ellen


Thanks for sharing!

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