How to Fund a Special Needs Trust

How to Fund a Special Needs Trust

A special needs trust is often the best way for parents to plan for the future care of a child. The proceeds of a special needs trust can help pay for items and services that government assistance doesn’t cover, like transportation, computer equipment, and out-of-pocket medical expenses. A special needs trust also can provide additional living expenses and support that adult children with special needs may require to live independently. These trusts are particularly attractive because they typically do not impact the child’s eligibility for public benefits programs based on financial need, such as Supplemental Security Income (SSI) benefits. Funding of special needs trusts can occur in various ways.

Self-Settled or First-Party Special Needs Trusts

Self-settled or first-party special needs trusts are set up by individuals with special needs, assuming they are competent and do not have a legal guardian. If the adult child does not have the legal capacity to set up their own trust or has a legal guardian, then a parent, grandparent, guardian, or the court must set up the trust. A child with special needs is only eligible to set up a self-settled special needs trust if they are under age 65 and have a disability that the Social Security Administration defines as a disability.

In most cases, this trust is funded by an individual’s inheritance from a family member who mistakenly lealv or personal injury settlement. However, under a self-settled trust, the child with special needs owns the funds in the trust.

The child with special needs must be the beneficiary of the self-settled trust. Anyone can serve as trustee of a self-settled trust, except the child who is the trust beneficiary.

This type of trust also must contain a provision stating that any funds remaining in the trust at the time of the beneficiary’s death are payable to the state(s) Medicaid program(s). This mandatory reimbursement after death to Medicaid is required to pay back the State for all services Medicaid paid for during the child’s lifetime.

Third-Party Special Needs Trusts

Parents often establish a third-party special needs trust to hold future gifts or inheritances for the child with special needs. All payments go directly to the trust rather than the child. As the trust, rather than the child with special needs, owns the assets, the child remains eligible for need-based government benefits.

A designated trustee uses the funds in the trust to benefit the child with special needs. Only the trustee can handle the money in the trust and should pay the trust funds directly to the company providing the item or services, not to the trust beneficiary.

These trusts can hold unlimited funds and, as a practical matter, often are only funded once a child’s parents pass away and the trust receives the inheritance on behalf of the child. In this manner, the parents can provide for the child after their deaths without endangering the child’s access to much-needed government benefit programs.

Furthermore, unlike self-settled or first-party special needs trusts, the remaining balance of a third-party special needs trust need not be made payable to Medicaid. Instead, the remaining funds can either stay in the family after the child with disabilities has passed on, be donated to a charity, or be used any other way in which the settlors provide in the trust documents.

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Rubin Law is the only Illinois law firm to dedicate itself exclusively to providing compassionate legal services for children and adults with special needs. We offer unique legal and future planning techniques to meet your family’s individual needs.

Call us today at 866-TO-RUBIN or email us at to learn more about the services we can offer you and your family.