Providing for children with special needs
Managing Director, Head of Wealth Planning and Advice, J.P. Morgan Wealth Management
Structure gifts to beneficiaries with special needs without jeopardizing their ability to receive government benefits.
If you would like to provide financially for a child with special needs, you may want to do so in a “Supplemental Needs Trust” or “Special Needs Trust” (SNT). It is very similar to a regular trust, but it can provide for your child’s needs without jeopardizing your child’s ability to qualify for need-based governmental benefits.
Trust basics
A trust is usually created by the “grantor” of the trust – the person who provides the funding. For children with special needs, the grantor is usually the parent or guardian of the child, although there are times when it may be the child. A trustee is the person the grantor names to be in charge of the trust. The trustee is mainly responsible for investing trust assets (or hiring someone to invest them) and making (or withholding) distributions to the trust’s beneficiary. The beneficiary is the person or people for whom the trust is created.
Sometimes, parents want to set money aside for a child who they believe cannot handle money independently, but who isn’t likely to qualify for government benefits as the result of a physical or mental disability. This type of set-up would be a standard trust with restrictions on when the child can receive distributions.
This WealthFocus deals specifically with the trust provisions for parents who want to make sure their children can qualify for disability-related government benefits.
Special needs provisions
The purpose of creating a special needs trust is to provide funds for your child while at the same time preserving your child’s ability to qualify for need-based governmental benefits, most commonly Social Security Disability Income (SSDI) or Medicaid. An individual does not need to be a minor to have a special needs trust, but there are special rules for additions to a trust for a beneficiary who is age 65 or older.
In most cases, government benefits require the recipient to have no more than a certain amount of assets or income or both in order to qualify. Children with physical or mental disabilities who would otherwise qualify for benefits might not qualify if they either inherit or are given assets from their parents outside of a trust structure, or if they receive a settlement as the result of, for example, medical malpractice, an accident that caused their disability, etc.
The government generally looks at assets in a standard trust that can be spent on behalf of the person with a disability as that person’s income or assets, which would usually disqualify the beneficiary from receiving government benefits.
A special needs trust generally has to be set up so that distributions for the person with a disability can only be made to supplement, rather than to substitute for, benefits received from the government. Additionally, for trusts that the beneficiary funds on their own (usually with the proceeds of a settlement), the trust must require that when the person with a disability dies, the trust will reimburse the government (usually the state where the person lives) up to the amount of benefits that the government provided during the person’s lifetime, with any excess assets passing under the terms of the trust. Finally, the trust will often specify certain expenses, like extracurricular activities for the person with a disability, that should be paid for with distributions.
In some states, trustees are allowed to make distributions that would jeopardize the beneficiary’s ability to qualify for government benefits if the trustee believes the beneficiary would be better served by receiving the distribution – as long as those distributions are authorized by the trust document.
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Creating a trust for your child
Special needs trusts are most often drafted as part of a parent’s will or revocable trust and only take effect on the parent’s death, since the parent is likely to take care of the child’s needs during the parent’s lifetime. Frequently, but less often, they are created by parents who want to set aside money during their lifetimes to supplement the benefits their child is receiving.
Special needs trusts settled by someone other than the child can be somewhat more flexible in the way distributions are made for the child since the money funding the trust was never the child’s money. The creator of the trust can determine what happens to the balance of the trust’s assets, if any, when the beneficiary dies, since there is no requirement to reimburse the state government for the benefits the child received.
Trusts funded by the child
When the child is going to receive a settlement, the child, often acting through their parent or legal guardian, creates and funds a trust for their own benefit. Trusts that are settled by the beneficiary need to be drafted very carefully to make sure that the child with a disability does not retain any authority over trust assets that would cause them to be disqualified from receiving government benefits.
Further resources
Special needs trusts are fairly technical. It is a good idea to make sure your attorney is very familiar with their operation. If you don't have enough money to warrant a separate trust, certain organizations can also provide pooled special needs trusts.
J.P. Morgan professionals are here to assist you in thinking about making gifts to a child with special needs, but you should always engage independent legal counsel before undertaking any sophisticated planning.
Frequently asked questions about providing for children with special needs
Special Needs Trusts (SNTs) are designed to provide financial support to individuals with disabilities without affecting their eligibility for need-based governmental benefits like Social Security Disability Income (SSDI) and Medicaid. These trusts cover expenses that government assistance might not, such as therapies, education, or recreational activities, and are meant to supplement, not replace, those benefits. In many cases, the government requires the recipient to have no more than a certain amount of countable resources – assets and income – to qualify for disability benefits. To avoid being counted as resources, SNTs must meet specific legal requirements. In short, SNTs offer a financial safety net that can enhance the beneficiary’s quality of life while preserving access to critical support.
Setting up an SNT involves creating a legal document that outlines how the trust will work and choosing a reliable trustee to manage it. The goal is to ensure the trust doesn't interfere with your child’s eligibility for disability benefits like SSDI and Medicaid. This often means including specific rules to protect the assets and ensure the trust distributions supplement, rather than replace, government benefits. SNTs are frequently drafted as part of a parent's broader estate planning and take effect upon the parent's death, but they can also be created during the parent's lifetime to supplement benefits.
A first-party SNT is funded with the beneficiary's own assets, like an inheritance or court settlement, and must repay the state for Medicaid benefits received during the beneficiary's lifetime after the beneficiary's death. In contrast, a third-party SNT is funded with assets from someone else, such as a parent or grandparent, and doesn't require this repayment. Third-party trusts can be more flexible in how distributions are made, as the funds were never the child's money. Understanding these differences can help you choose the right trust for your situation.
SNTs can cover a variety of expenses, such as medical care, education, housing, and personal care items. However, they should be used to supplement, not replace, disability benefits. This means the trust can pay for additional expenses like extracurricular activities or therapies that improve the beneficiary's quality of life, which are not typically covered by government assistance. It's crucial to manage the trust carefully to ensure these payments do not interfere with the beneficiary's eligibility for government benefits. For example, if trust funds are used to pay for basic living expenses like food and shelter, it could be considered income, potentially affecting eligibility for Supplemental Security Income (SSI) and Medicaid. In some states, trustees can make distributions that might impact benefits if they believe it's in the beneficiary's best interest, as long as the trust document allows it.
When establishing an SNT, it’s important to understand the trust’s terms and ensure it meets all legal criteria to maintain your beneficiary’s eligibility for important disability benefits. A J.P. Morgan professional can work with you and your legal advisors to help navigate the complexities of special needs trusts and ensure the trust is structured in a way that supports your loved one’s needs.
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Managing Director, Head of Wealth Planning and Advice, J.P. Morgan Wealth Management
