A special needs trust can help parents ensure that children with disabilities have sufficient resources and a good quality of life.

Parents of a child with a physical or mental disability often focus much of their time and energy managing their son’s or daughter’s medical challenges. As a result, it can be easy to overlook the value of planning for that child’s long-term financial well-being. Developing a strategy to provide financially for a young or adult offspring with disabilities can bring peace of mind and help ensure that his or her needs — as well as those of the rest of the family — are met, even after the parents are gone. One tool that can be especially helpful is a “special” or “supplemental” needs trust. “Special needs trusts can be a wonderful way to take care of a loved one with a disability,” says Heather Boyet, Vice President and Trust Advisor with Regions Private Wealth Management.

How it Works

A special needs trust can cover expenses that enhance the child’s quality of life that often aren’t fully covered by insurance or government disability programs. This may include physical or mental therapy, computer equipment, transportation to medical appointments and even vacations.

What’s more, a properly designed special needs trust shouldn’t compromise a child’s eligibility for government benefits like Medicaid or Supplemental Security Income (SSI). This is significant, as government regulations generally mean that a special needs child with assets of more than just $2,000 may no longer qualify for some government benefits. However, due to the size of the funds of the trust, some trustees may take the option to disburse additional funds and disqualify government benefits if it is in the beneficiary’s best interest.

The government restricts who can be a beneficiary of a special needs trust. It’s generally available only to people considered disabled under the Social Security Act. With some special needs trusts, the beneficiary must be younger than 65 when they are established. In addition, the beneficiary can’t have direct access to the funds in the trust. Instead, a trustee must manage the assets.

Although each special needs trust is unique, it generally falls under one of two categories: A “first-party” trust is funded with any assets the child possesses, such as money from an inheritance, retirement plan or legal settlement. (One note: If the beneficiary dies while assets remain in a first-party trust, the government may be able to recoup the cost of the government benefits he or she received while alive.)

In contrast, a “third-party” special needs trust is funded by someone other than the individual with special needs, typically his or her parents. The funding doesn’t have to occur when the trust is created, but can take place later. For instance, a trust could be funded with the proceeds of a life insurance policy when the parents pass away.

Making It Effective

Once a special needs trust is established, it — and not the individual with the special needs — should be the designated beneficiary on any retirement accounts or insurance policies. Similarly, relatives who would like to include the child within their wills should be asked to direct any bequests to the trust rather than the individual in order to reduce the risk that the beneficiary’s asset level will leave him or her ineligible for government benefits.

The trustee has several significant responsibilities. Beyond managing the trust’s assets to best meet the beneficiary’s long-term needs, he or she usually will work with the child’s healthcare providers and caregivers to ensure high-quality, cost-effective care. The trustee also will have to follow applicable regulations. For instance, distributions from the trust should not be made directly to the beneficiary, as that could disqualify him or her from government benefits.

Most parents consider several factors when deciding how much property to place in the trust. These typically include an assessment of their own income and resources and any other children to whom they’d like to bequeath assets, as well as an estimate of the expenses the child is likely to incur over his or her lifetime.

While parents initially may expect to transfer their assets to another loved one to handle the finances for a child with special needs, it makes sense to first consider the potential drawbacks of a family member taking this role. For example, what if times are hard and that family member has bad financial judgment, or if there are creditor issues, divorce proceedings or even bankruptcy?

Extra Care

Along with the trust, most parents of children with special needs will want to draw up a couple of other important documents:

Power of attorney or guardianship rights

This can allow parents continued access to their child’s medical records and enable them to make financial and healthcare decisions after the child turns age 18.

Guidance letter

This can help the trustee or other caregivers better understand the child’s healthcare needs, personal interests and preferences. For instance, it might mention the child’s favorite foods or activities. “That letter is key,” Boyet says. “It’s a letter from the parents saying, ‘This is a list of important things to know about my child.’” Although it doesn’t create a legal obligation, the letter can help those caring for the beneficiary do so with greater awareness.

If you have a child with special needs, your Regions Wealth Advisor together with a Trust Advisor can help you secure his or her financial future through competent, compassionate planning and assess whether a special needs trust or another planning strategy is right for you.