Parents of children with special needs often become fantastic jugglers. They juggle their child’s medical care, education progression, and become a pinnacle of support for their mental and physical well-being. Planning beyond the day, week, or even month can feel overwhelming. While no “ball” is considered more important in the juggling game, a necessary component that should be considered is your child’s financial future. Here we detail the steps necessary on how to set up a special needs trust as part of their financial strategy.

What is a Special Needs Trust?

A special needs trust (SNT) is the best tool to ensure your child’s financial needs are addressed throughout their life. At the core, a special needs trust guarantees your special needs child remains eligible for public benefit programs, such as medicaid or SSI, while also receiving supplemental funds through the trust. 

Many families believe that a sound estate plan is sufficient to care for loved ones who are disabled. For example, some families simply edit a family trust with provisions related to converting all or a portion of the trust into a testamentary special needs trust at the point of a diagnosis for a special needs child. Other families might decide that an individual should set up their own special needs trust on receipt of inherited or gifted assets. Establishing a special needs trust ensures there is structure and clarity with asset allocation for your child, without disrupting the important benefits they may already be receiving. 

There are different types of special needs trusts and it is important to know how to utilize each type while also considering other aspects of planning, such as ABLE accounts, personal assets,  income, life planning and other requirements that are individual to your family. The process of establishing an SNT is highly complex and highly structured; however, its creation is at the core of special needs planning.

How to Set Up a Special Needs Trust

Now that you’re ready to set up a special needs trust, you may be asking yourself where to begin. While this process can’t be characterized as simple, it is necessary. To make the process a little easier we’ve identified how to set up a special needs trust in five steps.

1. Find a Special Needs Planning Attorney

One of the first steps in getting started with an SNT is having the right and most specialized people in your corner – and arguably the most important is a special needs planning attorney. 

Their role is to help you and your family navigate the complexities of medical and financial resources and provide guidance on planning paths. The Special Needs Alliance provides an easy look-up tool to find a specialized attorney in your area. 

2. Consider Which Type of Trust Suits Your Child’s Needs

There are three types of special needs trusts to consider depending on your goals and circumstances: first-party, third-party, and pooled trust arrangements. Within each of these trusts the special needs child is deemed the beneficiary, however, they differ in terms of who the trust assets originally belong to. 

For example, in a first-party trust the assets belong to a beneficiary who needs to shelter those assets in order to maintain government benefits.  First party SNTs typically derive from an inheritance or personal injury settlement. In a third-party SNT, the assets belong to a person, such as a parent or grandparent, who is planning in advance for a loved one with special needs (typically their child or grandchild with disabilities). These assets can include personal assets, family trust assets, retirement funds, insurance policies, etc.  

First and third-party SNTs name trustees and fiduciaries as well as trust protectors, guardians, and other individuals directly in the trust to oversee and implement the plan for a special needs child. This is in contrast to a pooled trust arrangement that a special needs individual can participate in. A non-profit organization establishes the pool and creates the participation agreement and terms.  The not for profit is the trustee and the trustee will name subadvisors as needed for certain aspects of their scope of work.  

In all cases, it is important to carefully draft and review governing documents to understand the duties and powers of the trustee and the entitlements of the beneficiary(s).  An attorney can help you identify which trust is best suited for your family.

3. Map Out the Trust Specifics

The SNT will act as a supplement to public benefit programs, so it’s important to take stock and iron out how the trust will be used long-term. When developing the trust, consider these points:

  • Will the trustee be an independent fiduciary or corporate trustee?
  • Will the trustee have the power to appoint a care manager for aspects of the treatment plan for the “person” as well as act as trustee over the “assets”?
  • Will there be a successor trustee(s)?
  • How will the SNT be used?
  • How much money will be included in the trust?
  • Should a “trust protector” be appointed?
  • Who are the beneficiaries?
  • What are the individual needs of the special needs person and will a life care plan be developed?
  • Has guardianship been considered and is that clearly described in the trust document?
  • If a guardian is required, what is the scope of their authority over the beneficiary?

A special needs trust can be used in a multitude of ways such as for medical care, living expenses, transportation, food and beverage, entertainment, education, end of life expenses, and more. 
While technically allowed, food and beverage costs paid out of a SNT could negatively impact a beneficiary’s government benefits. Other accounts can be established to address this, which stresses the importance of working with a fiduciary special needs planning advisor such as a Chartered Special Needs Consult (ChSNC) or a Certified Financial Planner (CFP).

4. Lean on a Specialized Financial Advisor

The goal of a trust is for the funds to flourish. Working alongside a financial advisor with experience in special needs trusts ensures your child’s financial needs are prioritized, while also following SNT-related best practices. 

Trustees, acting in a fiduciary capacity, are required to defray expenses and govern trust assets to minimize large losses through appropriate risk management, governance, and diversification. A fiduciary financial advisor will work to ensure the trustee’s legal obligation to invest the SNT assets are fulfilled and provide expertise into investment management and overall financial planning. 

Trustees may also name a financial advisor as a subadvisor. As subadvisor, the financial advisor is delegated asset management and special needs planning, as needed.  Financial advisors can also act as a fiduciary or under a standard of care mandate. As such, they can protect trustees and share the responsibility for the success or failure of a plan that is set in place for a special needs person.

5. Draft the Necessary Documents

Your attorney will share all of the necessary documents needed to establish the SNT. One important document to make note is the Letter of Intent (LoI), which describes how you want your child to be cared for after you go. While this is not a required legal document, the LoI establishes guidance for things like religion, personal preferences, living arrangements, behavior, etc, for the child’s caregivers. 

It is important to review and evaluate the trust and supporting documents at least once a year with the team of advisors. You will also want to carefully review traditional estate plans periodically alongside your special needs planning attorney.  Remember to inform all advisors of their appointments and duties in the event they step in to act. Regular reviews like this can identify shifts in planning requirements and highlight unexpected areas that demand attention. 

Related: How to Prepare Your Child’s Special Needs Trust Before You Go 

While some pieces of establishing a special needs trust may be tedious, the reward of knowing a thorough plan is in place is extraordinary. Peace of mind is the end result for families.

Whether you’ve just begun your journey of establishing a special needs trust or you have more in-depth questions on SNT coverage, we’ve created a helpful resource for you. Check out our guide, How to Prepare Your Child’s Special Needs Trust Before You Go, for an in-depth look into special needs trust planning.

Nguyen Vu

Nguyen Vu is Vice President of Business Development for Prudent Investors. Vu has extensive experience with a fascinating background in highly creative roles with Oakley, Restoration Hardware, and Stacy Dukes Design. Vu has worked across major areas around the globe including Miami, Verona, and Belarus. He also spent five years in Beijing in international business development with a privately owned Chinese corporation and was instrumental in negotiating large trade agreements for mass deliveries of locomotives and railway cars.