How to Set Up a Special Needs Trust for Your Loved One

Jul 7, 2022 | Trusts

As the parent or caregiver of a special needs child or adult, you aim to provide financial support so that only the brightest future is ahead for them.

In Texas, many special needs individuals benefit from government assistance programs like Medicaid, Medicare, SSI, and the VA. These programs can provide valuable support in covering the costs of your loved one’s care. However, if you’re looking to provide your family member additional financial support, you may find that strict eligibility rules can impose limitations on what you can give.

Thankfully, special needs trusts can help bridge the gap between program restrictions and the support your loved one deserves.

What is a special needs trust?

Special needs trusts are ideal for families with disabled or developmentally delayed children or vulnerable adults. Sometimes referred to as supplemental needs trusts, these trusts are specifically designed to support those family members by paying for needs that government programs don’t cover, including:

  • Some personal care items
  • Home health attendants and caregivers
  • Family vacations
  • Home furnishings
  • Out-of-pocket medical and dental expenses
  • Educational expenses, including supplies and materials
  • Costs related to transportation, including purchasing a vehicle for going to care appointments
  • Rehabilitation expenses not covered by insurance or benefits

The impact of special needs trusts on government benefits

If you’re caring for a person with special needs, they probably receive government assistance from SSI, Medicaid, HUD, and similarly categorized programs. The last thing you want is for yourself or a well-meaning relative to gift a significant financial sum to a child that relies on these benefits. Doing so would be considered a countable form of income and directly impact their benefits negatively.

Special needs trusts essentially own the financial assistance you put into them. A trustee you appoint distributes payments on behalf of your child, the beneficiary, up to a certain amount to avoid exceeding income limits for the programs they participate in.

Remember that these trusts require specific terms and wording to safeguard your loved one’s eligibility for government assistance. They require thoughtful planning and documentation, so take the time to discuss your plans with a knowledgeable San Antonio special needs trust attorney.

A quick guide to setting up a special needs trust in Texas

The steps required to set up a special needs trust are straightforward, but you’ll want to ensure you’re familiar with the process before getting started.

1. Determine how much funding your beneficiary needs for their care requirements

Before opening a trust, you need to assess how much financial support your loved one requires. Take into account their ability to take care of themselves, their current state of health, and what future level of care may be needed, along with the standard of living you’d like them to maintain.

An estate planning attorney familiar with special needs trusts can guide you through the process of funding it, whether through injury settlements, family contributions, inheritance, or life insurance policies.

2. Deciding what type of special needs trust to use

Special needs trusts come in several forms. Below is a brief overview of each and how they may benefit your disabled family member.

First-party trust

If your loved one already has assets, a first-party trust can be created using those, but the beneficiary must open it themselves.

Once created, a trustee can have the assets transferred to their control. The downside to this option is that state and federal assistance programs, such as Social Security, can seek repayment from this account once your beneficiary passes away. Any remaining funds would then go to the beneficiary designated by your disabled loved one.

Third-party trust

These trusts are created and funded by a family member or friend. When creating this type of trust, you have two basic options:

Single stand-alone trusts are ideal when you have family members who want to gift your loved one with cash. Any funds in this kind of trust will be immediately available.

Revocable living trust subtrusts only get funded when the beneficiary’s parent dies and bequeaths their assets to a sub-trust. This is ideal when no other relatives plan to leave financial support for your child.

Family and friends who want to transfer these funds must sign over ownership to the trustee.

Consult with your relatives about creating a third-party trust and explain that funding cannot be used for food or shelter but only for quality of life purchases. Doing otherwise could jeopardize your special needs child’s housing and nutrition benefits. Any remaining financial support left after the beneficiary passes away can go to another designated heir. Payback to state and federal assistance programs is not an issue for this type of trust.

Pooled trust

If you want to collect assets from different sources, such as relatives or money the beneficiary owns, and then invest these funds, pooled special needs trusts might be an option.

Typically, a third-party nonprofit will administer the trust on your loved one’s behalf, make necessary investment decisions, and handle taxation. Essentially, they’ll act as the trustee for your loved one’s assets. The nonprofit will have a separate account for participants and distribute gains to these trusts accordingly.

You and your relatives can also create a pooled trust as first-party contributors.

The appeal of this account type is you can pool together different funding sources and have the trustee grow the value of assets held in the trust over time. When the beneficiary dies, the remaining funds are distributed in up to two ways:

  1. Any money left from a first-party pooled trust will pay back the state assistance programs your disabled child depended on during their life.
  2. Any money left resulting from a third-party polled trust usually has a percentage awarded to the managing nonprofit. Anything remaining after that goes to the heir designated by the beneficiary when joining the investment fund.

3. Hire a Texas special needs attorney

Despite the complex nature of Texas special needs trusts, the long-term payoff for your relative is worth the effort. If your family wants to create one of these trusts, you should consult with a knowledgeable estate planning attorney that specializes in these matters. This will ensure you don’t inadvertently jeopardize your loved one’s well-being by impacting their government benefits or care.

Don’t leave your special needs family member’s future to chance

At the law firm of Shann M. Chaudhry Esq., Attorney at Law PLLC, we understand that every case is unique and that there isn’t a quick cookie-cutter solution for creating special needs trusts.

Our special needs attorneys provide thoughtful and forward-thinking advice to ensure any financial support you give achieve the level of care and comfort you want for your child or adult relative. We’re here to answer any questions or concerns you have about creating this trust and are happy to assist in any way we can.

We service clients statewide, with offices in San Antonio, Austin, Houston, and Dallas.  Most of the time, we meet with clients over the phone or via Zoom.

Contact our office today to schedule an affordable consultation to discuss your estate planning needs.

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