Estate Planning

Estate Planning for a Special Needs Child (Complete Guide)

Ty McDuffey


Families who have children with special needs must take extra precautions while preparing their estate plans.

This is true whether their special needs child is still a minor or an adult, and it is especially true if the child is receiving—or will be receiving in the near future—needs-based public benefits such as Supplemental Security Income or Medicaid.

While planning considerations for such a child will differ depending on the child's age, competency, and other family factors, you've come to the right place if you need help with estate planning for a child with special needs.

By developing an estate plan, you provide lifetime money management for your special needs child, secure their eligibility for public benefits, and ensure a pool of resources is available for future use.

You'll undoubtedly want your love, care, and support to outlast you as a parent. But parents must correctly assign their estates to guarantee that the percentage of their estate that transfers to a special needs child is recognized as an available asset by public benefit agencies.

Below are some concrete steps to make that happen for your special-needs child.

What Is the First Step to Take as I Start Estate Planning for a Special Needs Child?

The first step is to choose a special needs planning attorney you can rely on to be your guide. 

That attorney will assist you in creating a special needs trust (SNT) for your child and can also assist you in locating the right life insurance provider. 

A special needs trust is a trust with a trustee that receives money from the parents after they die. The trust will ensure that your child receives the inheritance you want them to receive while not jeopardizing the child's eligibility for public services.

 If your child is unlikely to be self-sufficient as an adult, you should contact a special needs trust attorney.

How Do I Choose a Trustee for a Special Needs Trust?

Choosing your trustee is one of the essential decisions your family will make to ensure the long-term sustainability of your special needs trust. 

Because of the everyday pressures that all families face, someone in your family may regard the funds in the Special Needs Trust as their money rather than your special needs child's money. This can be dangerous, especially if your child's eligibility for public benefits is at stake. 

In most families, choosing an impartial, non-family person to serve as your special needs trustee is a good idea, such as:

  • A parent;

  • A sibling;

  • Your attorney; 

  • A trusted financial institution; 

  • A non-profit organization—particularly one with special needs experience; or 

  • Co-trustees (usually another family member)

The selection of any of these possible trustees has benefits and drawbacks. Before making your trustee selection, consult with your attorney or financial counselor.

What Are the Different Kinds of Special Needs Trusts (SNTs)?

SNTs from Third Parties

Third-party trusts do not require federal regulation. They are established for a disabled/special needs beneficiary with monies from another party through a gratuitous transfer made during the donor's lifetime or at death.

Anyone can create or add to third-party SNTs. A parent typically establishes a third-party SNT to utilize their assets to enhance their child's life while protecting the availability of critical public services.

With third-party SNTs, there are zero concerns about existing Medicaid claims, no age limitations, and no payback clauses to state agencies. 

However, as with a self-settled trust, proceeds should not be delivered straight to the beneficiary. This may limit or eliminate the recipient's eligibility for public benefits. 

It is critical that a third-party special needs trust be correctly designed so that it is solely discretionary and supplemental and does not include Medicaid payback conditions. 

It is also crucial that the assets be disbursed to individuals designated by the trust's donor upon the beneficiary's death. 

Self-Settled SNTs

Self-settled SNTs (sometimes called "1st Party SNTs") have particular authority under federal law.

Self-settled trusts are founded with a disabled person's assets. It is often established in conjunction with the settlement of a personal injury case by the guardian or caretaker or under the supervision and guidance of a court.

The trust has to help the disabled individual exclusively. It must be: 

  • Irrevocable; and

  • For an individual under the age 65

The assets left over in the trust must first be utilized to reimburse any state Medicaid agency that provided benefits to the disabled individual upon the beneficiary's death. 

Furthermore, any previous Medicaid liens have to be addressed even after creating such a trust.

Once these difficulties are resolved, the beneficiary will be eligible for public assistance, and the trust can be utilized for further discretionary assistance.

These trusts are most commonly used when an individual who has suffered traumatic injuries wins compensation as a consequence of a court case. As a result, we won't go into greater detail about these trusts.

How Do I Fund a Special Needs Trust?

There are several ways to fund a Special Needs Trust:

  • Cash (which could be a present) (which could be a gift)

  • Property (personal and real) (personal and real)

  • Investments

  • A retirement plan (IRAs, pensions, 401ks)

  • Proceeds from a personal injury settlement

  • Life insurance for life

What Are the Typical Costs Associated with Establishing Special Needs Trusts?

Fees for special needs trusts vary considerably between geographies. Still, because it is such a specialized and highly personalized tool, you might find that it costs more to create.

Be extremely wary if someone offers you a trust for less than $2,000 USD. Cheap, boilerplate special needs trusts are sometimes used to entice naive parents into high-pressure life insurance sales pitches for high-commission, low-quality products.

How Can a Family on a Tight Budget Set Up a Special Needs Trust if They Can't Afford to Hire an Attorney?

Many attorneys accept credit cards or pro-bono cases. Some lawyers may be willing to work with you to set up payment plans.

Do You Need Special Permission to Spend the Money?

The trustee does not require approval from anyone. However, if the trustee spends money in a way that violates the state's SSI or Medicaid guidelines, the beneficiary may lose benefits.

What Are Some Discretionary Distribution Examples?

Having a special needs trust in place can considerably improve the beneficiary's lifestyle while maintaining eligibility for valued and essential public benefits. 

The following is a non-inclusive list of discretionary or supplemental expenses that can be undertaken with an SNT without endangering or losing public benefits:

  • Medical assistance or supplies that are not protected by a government program

  • Household and individual care assistance (friends or sitters, for example).

  • Internet access; television; smartphones, and electronic equipment

  • A vehicle utilized for transportation

  • Living expenses

  • Lessons or classes that are scholarly or recreational in nature.

What Should We Tell Our Relatives to Keep in Mind while Leaving Money to Our Children in their Will?

Informing everyone who may have named your child in their own wills about the special needs trust is a terrific idea. 

That's why your special needs trust should be accessible to all family members in one place instead of scattered in separate documents. Trustworthy can help your whole family access special needs estate planning documents online, so they can include the trust in their estate planning and leave money to the special needs trust.

What Are the Financial Benefits and Drawbacks of Establishing a Special Needs Trust? If We Put Money Into it Today, Will We Be Able to Withdraw it Later if We Need it?

The only advantage to putting money into an SNT while you are still living is that it will be removed from your estate for tax purposes. 

If your trust is revocable and you put money in it, you can take it out, but there is no benefit to doing so. 

If your trust is irrevocable, there is an estate tax benefit to placing money in it, but you can't take it out later.

3 Special Needs Estate Planning Actions You Can Take Right Now as a Parent

As a parent, you can prepare for your child's future by following these three steps:

Step 1: Create a dedicated team of family members and specialists with Trustworthy

When you upload your special needs estate planning documents to the cloud through Trustworthy, your attorney, social workers, and financial advisor will be able to access them and get familiar with fiduciary obligations, government benefits, tax regulations, and any particular concerns your family may have.

Step 2: Determine Your Special Needs Estate Planning Requirements

Set short- and long-term estate planning objectives. Determine how much money your loved one will require.

Consider the lifestyle you want for your loved one, the cost, and the resources required to make it a reality.

Create a letter of intent to direct future caregivers and trustees about your desires.

Step 3: Revisit These Steps on an Annual Basis

You should revisit these steps on an annual basis to examine any changes in health or benefit eligibility, financial condition, or any other changes.

What Are the Benefits of Life Insurance for Families Who Have a Special Needs Child?

When it comes to life insurance, it might be a wise investment for families who have a special-needs child.

For example, the death benefit gives income tax-free cash assistance, which might assist your family in maintaining your existing standard of living. 

A policy's cash value can help with current and future expenses associated with parenting a special needs child, and it can grow tax-deferred.

Are There Any Education and Employment Opportunities We Can Take Advantage Of?

Every parent hopes that their child will realize their full potential. This includes getting an education and finding a profession or vocation that they enjoy.

A 529 College Savings Plan allows families to save money for a variety of educational expenses. Please keep in mind that money from this account can be rolled over into an ABLE account.

The funds grow tax-free. Always use funds in a 529 plan for qualified expenses such as tuition, fees, and school supplies to avoid jeopardizing your child's SSI benefits.

The "Ticket to Work" initiative of the Social Security Administration (SSA) allows SSI users to explore free job options. Furthermore, the Plan to Achieve Self-Support (PASS) permits SSI beneficiaries to set aside money to pay job-search expenses.

Is it Possible to Dissolve a Special Needs Trust?

Because special needs trusts are irreversible, they cannot be dissolved. A special needs trust has relatively few provisions for modifying or revising it.

How Can I Form an Estate Planning Team?

We recommend a collaborative approach to estate planning for a child with special needs.

Consult and work with an attorney, financial advisor, care planner, and trust officer. 

It's best to make informed decisions that will keep your child safe for as long as possible with the help of other people through Trustworthy.

Do you have any questions about how a Trustworthy will fit into your life? Find out more about what we have to offer. Start your 14-day free trial to protect your loved ones and property.