How to Set Up a Special Needs Trust Account

A Special Needs Trust (SNT) holds assets for an individual with a disability, enhancing their quality of life without jeopardizing eligibility for government benefits like Supplemental Security Income (SSI) and Medicaid. This type of trust provides a secure framework for managing funds for individuals who rely on public assistance.

Understanding Special Needs Trusts

Special Needs Trusts fall into two main types based on funding sources and obligations. First-Party Special Needs Trusts, or self-settled trusts, use assets belonging to the disabled individual, such as personal injury settlements or inheritances. These trusts include a Medicaid payback provision, meaning any remaining funds upon the beneficiary’s death must first reimburse the state for Medicaid benefits received.

Third-Party Special Needs Trusts are funded by others, like family members. They typically do not have a Medicaid payback provision, allowing remaining funds to pass to other designated beneficiaries.

Key individuals in an SNT include the Grantor (who establishes and funds the trust), the Beneficiary (the disabled individual), and the Trustee (who manages assets and makes distributions). The Trustee has a fiduciary duty to act in the beneficiary’s best interest.

An optional Trust Protector provides oversight, with powers like removing or replacing a trustee. SNTs cover “supplemental needs”—expenses that enhance the beneficiary’s quality of life—without providing for basic support. This distinction prevents distributions from impacting government benefit eligibility.

Gathering Essential Information and Making Key Decisions

Before drafting an SNT, gather information and make foundational decisions. Understand the beneficiary’s current and anticipated needs, including medical care, therapy, housing, and transportation.

Assess the beneficiary’s financial status, including assets, income, and government benefits like SSI and Medicaid. Consider potential future inheritances or settlements. Identify specific assets to fund the trust, noting their type, value, and origin.

Decide on the trust’s structure, choosing between a First-Party or Third-Party SNT based on asset source. Select a suitable trustee with financial acumen and an understanding of special needs, and name successor trustees for continuity.

Establish clear distribution standards for covered expenses, ensuring distributions do not jeopardize government benefits. For Third-Party SNTs, identify remainder beneficiaries. Consider incorporating a Trust Protector and defining their powers. Consult an attorney experienced in special needs planning during this phase.

Drafting the Special Needs Trust Document

Drafting an SNT involves creating a precise legal document. It must be in writing, signed by the grantor and trustee, and often notarized for legal validity.

The trust document must identify all parties: Grantor, Beneficiary, and Trustee. It must state the trust’s purpose is for supplemental needs only, preserving government benefit eligibility. A spendthrift provision protects assets from creditors.

Distribution standards grant the trustee discretion over funds for “supplemental needs only,” preventing negative impacts on government benefits. The document also includes provisions for successor trustees and trust termination. First-Party SNTs must include a Medicaid payback provision. The trust document outlines the trustee’s powers for managing assets and, if applicable, the trust protector’s powers.

Consult an attorney specializing in special needs law for drafting due to complex federal and state laws. Errors can jeopardize the trust’s purpose and benefit eligibility. After signing, the trust becomes a separate legal entity, requiring a Taxpayer Identification Number (TIN) from the IRS for tax reporting.

Funding the Special Needs Trust

After the SNT document is established, formally transfer assets into the trust. A trust is not effective until assets are legally re-titled or assigned to its ownership. This “funding” process allows the trust to manage and distribute resources.

Asset transfer methods vary by asset type. For cash, open a bank account in the trust’s name and deposit funds. Real estate transfers require a new deed conveying ownership to the trust, signed and recorded with the local county recorder’s office.

For investments and securities, like brokerage accounts, re-title them into the trust’s name. This involves contacting the financial institution to complete change of ownership forms. Fund life insurance policies by changing the beneficiary designation to the trust.

Transferring retirement accounts, such as IRAs and 401(k)s, to an SNT as a beneficiary involves complexities due to tax implications and distribution rules. Consult a financial advisor and an attorney for these transfers. Personal property can be assigned to the trust through a general assignment document or listed within the trust. Maintain records of all transferred assets.