When planning for a loved one’s future, ensuring their well-being is a top priority. If they’re financially dependent on you, need assistance with financial decisions, or rely on public benefits to meet their needs, proactive planning is essential. Establishing a special needs trust (SNT) can provide peace of mind, helping to ensure continuity of care and support even after you’re gone.
What’s a special needs trust?
An SNT, also called a “supplemental” trust, is a legal arrangement designed to support individuals with disabilities by holding funds for their benefit without jeopardizing eligibility for essential government programs like Medicaid or Supplemental Security income. If something were to happen to you, an SNT can help ensure your loved one is financially protected, receives the care they need, and continues to qualify for critical benefits.
SNTs work by allowing a trustee to make discretionary distributions for the beneficiary’s needs — such as therapies, adaptive equipment, or quality-of-life enhancements — without those funds being counted as personal assets when calculating benefits for government programs. This means benefits can be preserved, and the trust’s resources can be used to supplement, rather than replace, those benefits. For example, parents of a child with a brain injury might use an SNT to fund therapies or home modifications, helping to ensure these expenses don’t interfere with benefit eligibility.
An SNT can even own a home for the beneficiary. In this arrangement, the beneficiary may pay rent to the trust, which helps reduce their personal assets and provides the trust with funds to cover home-related expenses like property taxes, maintenance, and utilities without jeopardizing eligibility for benefits.
SNTs are appropriate for a wide range of situations. They’re commonly used for individuals who currently receive, or may one day need, needs-based government benefits. However, SNTs can also benefit those who don’t rely on public assistance but need help managing finances due to a disability or vulnerability to financial exploitation. In these cases, an SNT can prevent rapid depletion of assets and protect against financial predators.
Because the needs of beneficiaries can change over time, SNTs — especially trusts funded by a third-party — are often drafted with flexibility in mind, allowing for adjustments or even termination under certain conditions.
Recent legislation has made planning easier
The Secure Act 2.0, passed in December 2022, introduced important updates that simplify planning for individuals with disabilities. Under these new rules, an SNT can be named as the beneficiary of qualified retirement assets. If the beneficiary qualifies as an eligible designated beneficiary, the trust is eligible for stretch or life expectancy distributions, allowing for more flexible and tax-efficient payouts.
Additionally, the legislation now permits charitable organizations to be named as remainder beneficiaries of SNTs. This change expands planning options for families who wish to support a charitable cause after the principal beneficiary’s needs have been met.
Another valuable strategy is combining an SNT with an Achieving a Better Life Experience account. This approach provides the beneficiary with greater flexibility, especially if they earn some of their own income, and allows for more effective management of resources while maintaining eligibility for public benefits.
Structuring a special needs trust
When setting up an SNT, there are several important factors to consider.
Funding the trust
Decide how the SNT will be funded. A first-party SNT is typically funded with the beneficiary’s own assets, such as settlement funds from an injury. In contrast, a third-party SNT is funded by someone other than the beneficiary such as parents, grandparents, or other loved ones, which is ideal for families who want to plan ahead. Additionally, an SNT can be funded with life insurance proceeds if the trust is intended to take effect after the death of a parent or caregiver.
Choosing a trustee
Selecting the right trustee is crucial. While family members are often chosen because they understand the beneficiary’s needs and can be trusted to act in their best interest, serving as a trustee can be complex and demanding. Many families opt for a professional trustee who has expertise in managing trusts and can coordinate with doctors, lawyers, and other advisors to make informed decisions. In some cases, a family member may be named as an advisor within the trust to help the professional trustee better understand the beneficiary’s unique situation.
Administering the trust
Proper administration involves managing taxes, distributions, investments, recordkeeping, and care planning. Trust assets require careful investment management, budgeting, and financial projections. While assembling a team of professionals may seem costly, their guidance can help ensure the long-term success and compliance of the SNT.
Will a special needs trust fit into your estate plan?
An SNT can be a powerful tool for safeguarding your loved one’s financial future and preserving access to essential benefits. But its effectiveness depends on thoughtful planning and expert guidance. By working with qualified advisors and starting the process early, you can create a plan that meets your unique needs, avoids costly mistakes, and provides lasting peace of mind. Don’t leave these critical decisions to chance — take steps now to protect and support the ones who matter most.
