Special Needs Trusts Considerations

Special Needs Trusts are designed to provide benefits to and protect the assets of individuals with various disabilities. These trusts are designed in a way to allow the person to be qualified for and receive governmental health care benefits, including long-term nursing care.

There are many considerations while choosing a trustee to manage a special needs trust. We have experience handling the multitude of unusual issues specific to special needs trusts, and we are fluent in their complexities. We are knowledgeable and experienced about public benefits, and issues unique to beneficiaries with disabilities. Choosing a bank or a trust company to administer a special needs trust can be impersonal. At AD Fiduciary we are licensed and regulated by the state of California, have substantial previous experience, and carry a smaller caseload making us a far better alternative.

Estate Planning with a Special Needs Child | The Special Needs Trust

Estate planning - the different ways to plan for a child with special needs, with the goal of leaving money to them while still preserving their public benefits. Three options are presented: custodian accounts, which allow someone to manage a child's money until they turn 25; setting aside funds in a normal revocable living trust, which has more flexibility in terms of when and how funds are distributed; and a Special Needs Trust (SNT), which is a separate, irrevocable trust where money is set aside specifically for the benefit of the special needs child, and the trustee has control over the funds. The main advantage of an SNT over the other options is that the beneficiary never has control over the funds, and the money cannot be considered as an asset or income to that beneficiary.

There are 3 Options – One is Often the Best

Planning one's estate isn't all it’s cracked up to be.  Planning becomes more complicated when you have a child with special needs and it depends on the level of care that child needs.  They might be on a public benefit like Medicare, Medi-Cal, or even Social Security.  They may have funds in their name and if it goes above a certain threshold, they lose that benefit.  There are a lot of variables to consider.  It may be one of the most stressful events you’ll ever plan for in your life.

There are three different ways to plan for this, yet still leave money to a special needs child, even if they can't manage their own finances.  However, there is one Special Needs Trust option that is often better than the other two.  Before diving into the Special Needs Trust itself, we’ll cover the other two options.

Custodian Account

Custodian Accounts are pretty straight-forward.  You select someone to serve as the custodian and manage assets for a child in a custodial account. This allows the person you name as custodian to manage a child's money and property until that child turns 25.  When that child reaches that legal limit, the money becomes the child's property outright.  It's usually a normal bank account or a brokerage account and the funds in it can be used for that child's benefit prior to them gaining control of the funds.  No terms can be set on how the money is to be used.  The custodian has to file a tax return on the child's behalf each year.

Trust Account

A typical Trust Account is when you set aside funds in a normal revocable living trust.  As a part of the distribution of your trust, you have funds set aside for the benefit of someone.  It’s very much like a custodial account; however, you aren't restricted to distributing the funds no later than age 25. You have a lot more flexibility to design how and when those funds are to be utilized.  For example, you can set a restriction that funds are not to be distributed until age 35 or allow distributions on the income stemming from the trust.  You could set amounts to be distributed at certain intervals and any money left over goes elsewhere.  The trustee is in charge of managing the money and holds the purse strings according to the terms you set.

Special Needs Trust

Finally, the Special Needs Trust (SNT) is a separate trust from your typical revocable living trust where money is sent and the entire purpose of the trust is to work for the benefit of someone else.  It's an irrevocable trust meaning once it's established and funded with money it's set in stone.  That is by design.  Having the trust be irrevocable means no matter what, the trustee of the trust has to use the funds for the benefit of the beneficiary.  In this case, the special needs child.  The money is explicitly not that beneficiary's property.  They don't have the right to the money in the normal sense.  The trustee runs the show, but it's not their money either.  The money belongs to the trust.

If the money outlasts the life of the beneficiary, then the funds go to the next beneficiary, outright. You will pick this beneficiary when you create the SNT in the first place.  The big advantage that the SNT has over a custodian or typical revocable living trust account is the control and right to the funds. 

Under a custodian account, the money has to go to the beneficiary no later than age 25 and there are no restrictions on what that money can be used for at all.  Funds in a trust account are not in the beneficiary's name, but that beneficiary has a beneficial right to the money and they may receive it at some point in time.  However, under the SNT, the beneficiary never has control over the funds.  They cannot force the trustee to make payouts the trustee deems unnecessary.  The funds go to a different beneficiary at the end of the day.  This means that the money held in a trust for the benefit of someone cannot be considered as an asset or income to that beneficiary when it comes to qualifying for public benefits or even creditors.  The money is truly separate from the beneficiary in all ways that matter.

Special Needs Trust Does Not Require Special Needs

A Special Needs Trust can also be used in other situations, not only where there is a child with special needs.  They can be established for the benefit of a child that has a drug problem or a money problem.  In this case, some refer to the trust as a Supplemental Needs Trust.  Additionally, you can create these types of trusts for anyone.  It doesn't just have to be a child of your own.