How Can I Leave Money to a Child with Special Needs?

In almost all cases where a parent leaves funds at death to a child with special needs, it involves a trust. Trusts set up for the care of a child with special needs are called supplemental or special needs trusts.

Money should not go outright to the child, both because they may not be able to manage it properly and because receiving the funds directly may cause the child to lose public benefits, such as Supplemental Security Income (SSI) and Medicaid which have complex eligibility rules. Often, these government programs also serve as the entry point for receiving vital community support services. 

Special Needs Trust (SNT)

There are various special needs trust types, including the following:

• Supplemental Needs Trust (third-party)
• Self-Settled Special Needs Trust (first-party)
• Pooled Special Needs Trust

In all SNT types, the beneficiary doesn’t own the trust’s assets, so they remain eligible for public benefit programs, including Social Security, Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), or Medicaid.

Supplemental Needs Trusts (Third Party)

In a supplemental needs trust, an individual or entity creates and funds the trust. They may also act as trustee to manage assets and oversee disburse funds to the beneficiary for additional financial support, not covered by benefits programs. Typically, funding comes from family gifts or inheritances and life insurance policies.

After a beneficiary passes, the remaining proceeds can be disbursed to other family members or charities. Medicaid does not need to be reimbursed for any previous healthcare expenses.

Self-Settled Trusts (First Party)

In a self-settled trust, funding comes from the assets, income, or lawsuit settlements belonging to the person with the disability. To ensure assets won't be counted for Medicaid or SSI purposes, the person with special needs must meet federal requirements:

• Under 65 when creating and funding the trust
• The trust is irrevocable, meaning no modifications, amendments, or termination of the trust is permissible
• Reimbursement to Medicaid must occur on the beneficiary's death if they received Medicaid benefits during their lifetime

Court intervention is often necessary to establish this trust and a trustee must manage the trust on the beneficiary's behalf to ensure assets are not countable toward benefits.

Pooled Trusts

A pooled special needs trust is comprised of many smaller special needs trusts to help families with smaller funds increase their investment potential for their loved ones. The trust is administered by a non-profit agency with a master document that applies to all the sub-trusts.

All special needs trusts provide money to enhance the beneficiary's lifestyle, including:

• Therapies that are additional or not covered
• Medical, dental, and eye services
• Wheelchairs, hearing aids, and other adaptive equipment
• Internet and cell phone services
• Electronic equipment
• Personal travel
• Furniture
• Case management services

Learn more about planning for children and adults with special needs. Consult with a special needs planner first to understand which option is best for your loved one. Each type considers your unique needs and circumstances.