The Special Needs Trust: Protecting Your Special Needs Child

By Ellen Rosner Feig December 10, 2007

Parenting a special needs child can be a wonderful and challenging task. But while you may be meeting your child’s needs at present, how do you ensure their needs will be met in the future? One way is by creating a Supplemental or Special Needs Trust.

What is a Special Needs Trust?

    A Special Needs Trust (“SNT”) is a legal document that holds in trust monies for the benefit of the physically or mentally disabled person (the “beneficiary”). A SNT will normally provide for supplemental needs beyond those provided by the government as Supplemental Security Income, Medicaid, Section 8 Housing or other benefits.

   It is important a SNT be drafted so the income from the trust is not considered a countable asset; money that is countable will be considered by the government when determining benefits available. Accordingly, most SNTs are drafted in such a way as to be irrevocable (i.e., cannot be changed or revoked), and the monies paid by the trust are paid directly to specific bills or creditors, rather than to the beneficiary directly.

How do you fund a Special Needs Trust?

   Funding a special needs trust can be an overwhelming, seemingly impossible task for many families. The present day costs of care, including medical bills, advocacy and education, may leave little left to put aside for any future planning. It is important to realize that any asset a family may have can be used to fund a SNT. These may include an inheritance, a lump sum award of money including from Social Security Disability, or additional income available. Many special needs trusts are funded in part with a form of life insurance. In these instances, a parent will take out a life insurance policy to ensure that once they are deceased, monies will be available to care for the special needs child.

   The various types of life insurance which may fund a SNT include:
Term Life Insurance: Term life insurance provides coverage for a defined period of time, normally the time in which premiums are paid. A term policy pays a benefit should the policyholder die within the period covered under the policy.

Whole Life Insurance: A whole life policy lasts for your entire lifetime and provides both death benefit protection and cash value. With these types of policies, part of the premium paid by the policyholder goes into a cash account which grows over time and may even pay dividends

Survivorship Life Insurance: This policy is taken out on the lives of two people and provides benefits only upon the death of the second insured person.

While funding a SNT with life insurance may be the best bet for many families, it is essential to consult with either a financial planner or attorney who devotes a significant part of their practices to working with individuals with special needs and with their families.

How much money needs to go into a Special Needs Trust?

   Determining how much money should be placed into a Special Needs Trust can be confusing. The cost of care for the disabled has risen while governmental resources have lessened. While medical benefits under Medicaid may provide adequate coverage for health care, social security disability cash benefits are simply not enough for most individuals to live on. Further, governmental programs recognize the importance of supplemental income but strictly limit the amounts that may be distributed. Accordingly, a SNT should not give the beneficiary more income than permitted under governmental regulations — or the beneficiary will face loss of benefits.

A SNT can be funded upon death, or funded during one’s lifetime. When you fund upon death, you may “name the SNT as the beneficiary of life insurance policies, retirement accounts and annuities”, creating an irrevocable trust. Funding during lifetime allows the family member to reduce estate tax liability by gifting within IRS regulations ($12,000 in 2007).

A financial planner, attorney, or accountant who understands the nature of a SNT can help a family create a trust that takes into account future costs of supplemental items, resources available at present, and resources which will become available in the future. When calculating the amount to be allocated to the SNT, the planner must first determine what resources are available to the family and then determine how to allocate them. A worksheet should be created listing the total monthly expenses of the disabled person (see sample worksheet at www.kidsource.com/kidsource/content4/estate.dis.all.3.3.html). One would then subtract the amount of governmental benefits and personal income of the person from the total monthly expenses to determine the amount of supplemental funds needed. It is important to add in any costs for advocacy services, including a case manager.

    By thinking of and planning for the future, families with special needs members will rest easier at night knowing that their loved one will be taken care of for the long term.

ELLEN ROSNER FEIG is a multi-published author (The Ex Files: Women, Litigation and Liberty) and attorney who writes extensively on legal issues surrounding special needs children. She is also a Scarsdale mom.

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