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Establishing a Special Needs Trust

May 16, 2022

What It Is and What to Do

A trust is a legal document that lays out the instructions for distribution of assets held by a “trustee” for the benefit of “beneficiary.” The assets in the trust could be cash, stocks, or other like investments: real estate, business interests, etc. A Special Needs Trust is designed to protect the assets of a person unable to fully care for themselves.

Setting Up Financial Security

There is more than one way to set up financial security for an individual with special needs, but most professionals would agree that when the resources are available creating a special needs trust is the best way. Therefore, it is suggested that caregivers read up on their options, then meet with a financial advisor. A professional well-schooled in this area will dissect the individual’s needs, the individual’s financial resources, the caregiver’s financial circumstances, and government benefits eligibility. After analyzing the data presented, the financial professional can make a recommendation. If the information allows for the creation of a special needs trust, then steps will likely be taken towards that goal.   

Funding a Special Needs Trust 

The purpose of a special needs trust is to ensure a certain level of quality to an individual’s life. Although government benefits may guarantee food, shelter, education, and medical care, those essentials fall short of reaching normal living standards. The trust allows for the purchase of recreation, vacations, computer equipment, transportation and other everyday items people have come to expect.

There are two basic types of special needs arrangements based on ownership of the property funding the trust:

  • Self-settled trusts also known as “first party” trusts
  • Supplemental trusts also known as “third party trusts”

A self-settled trust is funded by the resources of the individual with special needs. The funds can come from several areas including an inheritance or court settlement. In some cases, an individual may have become disabled and his/her net assets (e.g., home, money, investments, etc.) are placed in the trust for future needs.  The point here is that the beneficiary is the one funding the trust. However, the trust must be managed by someone (trustee) other than the beneficiary. Upon the beneficiary’s death, the remainder of the trust goes to the state to “pay back” Medicaid.

A supplemental trust is funded by someone other than the individual such as parents, relatives, or guardian. When the beneficiary dies, any remaining assets are distributed to the individual’s “remainder” beneficiaries. Here, there is NO provision to pay back Medicaid. 

Since the individual with special needs will likely need a lifetime of care and may even be expected to outlive his/her caretaker, life insurance on the caretaker is a practical solution to future funding. Permanent life insurance is recommended because of the option to borrow from the policy while the caretaker is alive. This feature is a good one since it allows for easy cash in the event of an unforeseen expense. Term insurance, which has no cash value, may be more attractive for some caretakers since premiums are much less. Life insurance (permanent or term) has the added advantage in protecting other family members in letting them benefit from assets remaining in the estate. Since there are tax and estate implications based on policy ownership (trust or caretaker), it is crucial to consult with a financial advisor concerning life insurance.

How to continue funding a special needs trust requires asking some important questions:

  • What is the individual’s prognosis?
  • How much does the caretaker have to contribute?
  • What are the current requirements and expected future needs?
  • Evaluate the resources. What government benefits does the individual receive now and is eligible for in the future? Is there investment income? Can the individual earn an income now or in the days ahead?


Protecting Government Benefits

Costs associated with caring for an individual with special needs are usually quite high which is why the bulk of those expenses are normally paid via the public largesse. Funding from a special needs trust should not be used to replace or off-set those benefits. The trust is only to make money available to pay for items not covered through government agencies. The arrangement is structured to insulate assets from government agency claims or disqualification from public assistance. While the trust comes with inherent protections, caregivers need to be judicious in assuring compliance with strict rules and regulations. To be eligible for government assistance, individuals with special needs cannot own too many assets within its “needs-based” system. Loved ones need to be careful about naming special needs individuals in their wills since a windfall of assets could cause problems regarding benefits eligibility or even trigger a “pay-back” provision. This is again why it is so important to speak with a financial advisor who can lead clients through these potential minefields.  


What to Expect


Setting up a special needs trust includes some of the same steps taken in normal estate planning such as writing up a will and designating power of attorney. In addition, caregivers of individuals with special needs will also want the following:


  • Letter of Intent: not a legal document but a paper describing the individual’s diagnosis, level of function and personal information like nighttime rituals, religious preferences, favorite meals, recreation likes, education and vocation arrangements and more. It is also an opportunity for the caretaker to explain how he/she wants the individual (if a child) to be raised.
  • Guardianship: designating a person charged with the duty of taking care of a person unable to manage his/her own affairs. This person would care for the special needs person as a minor and may even administer care if the individual is incapable as an adult.
  • Financial Security: analyze the individual’s diagnosis and needs, review individual’s and caretaker’s resources, compare data to individual’s eligibility to government benefits. If circumstances make sense for setting up a special needs trust, move forward with the help of trusted professionals.

Setting a Special Needs Trust in Place  

Dynamics differ in each case involving special needs persons and their caretakers. This “no one size fits all” approach in setting up a special needs trust means that each arrangement is customized. A caretaker will want to have discussions with a financial advisor to decide how the trust will be created and what it will do. Once the details are established, a lawyer will be needed to create the documents spelling out such items as fund resources and trustee appointment. Documentation will be written with the legalese that ensures that government benefits eligibility is never jeopardized.

Simplifying a Complexity

Caring for an individual with special needs often comes with many challenges. Ensuring that person’s future financial security is a worrisome matter with its own complexities. Rules, regulations, taxes, qualifications, medical requirements, etc. are among many issues to be addressed when providing for the lifetime financial needs of a person unable to care for him-/herself. Creating a plan with professionals who are experts in these matters will bring both comfort and assurance.   




Registered Representative, Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative. Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. New South Wealth Management and Cambridge are not affiliated.