Special Needs Trusts

A special needs trust (also commonly referred to as a Supplemental Needs Trust) is a legal entity established for the benefit of an individual who is physically or mentally challenged in order to permit that individual to benefit from property held in the trust while not impairing his or her ability to receive governmental assistance such as Supplemental Security Income (SSI) or Medicaid. These instruments provide protection for the assets within the trust and grant the trustee the discretion (but not the obligation) to make distributions for the beneficiary to meet certain specified needs and comforts not otherwise available to the individual.

These trusts are most commonly established to benefit family members (children, siblings, parents, spouses) who due to disability, illness, or injury are unable to provide for their own economic welfare. Assets held in the trust are owned by the trust and not by the beneficiary. The ability of the trustee to make discretionary, rather than required, distributions for other than basic requirements for food, housing, and medical care mitigates restrictions on supplemental care by public benefit programs. Required distributions, or distributions to meet the basic necessities of life, typically will result in a reduction of public benefits. In addition to providing supplemental comforts to the beneficiary, a special needs trust provide the ones who establish (the grantors) and the ones who fund the trust with peace of mind in knowing that their loved one will be appropriately cared for, even beyond the lifespan of the grantor or other family members. These trusts also relieve children, siblings, and surviving spouses from the burden of providing continued care and comforts to the special needs individual.

Special needs trusts can be established during the lifetime of the grantor (intervivos) or in the last will and testament of the grantor (a testamentary trust). A special needs trust established during the grantor's lifetime provides greater funding opportunities allowing the grantor or other family members to fund the trust with annual gifts free of transfer tax considerations, or to receive bequests from other family members who predecease the trust beneficiary.

Trusts of this type may be revocable or irrevocable. A revocable trust can be changed or terminated by the grantor as the needs of the beneficiary, or the grantor, change. The downside of revocable trusts is that the assets within the trust are considered to be owned by the grantor and are included in his or her estate and are subject to attachment by the grantor's creditors. While irrevocable trusts avoid these downsides, the grantor must surrender all ownership of the assets held by the trust.

Common means of funding special needs trusts are gifts from family members, bequests, personal injury settlements, or life insurance proceeds on the death of the grantor or other family member. The use of life insurance to fund the trust may be especially appropriate in that funds may be made available to the special needs individual without restricting passage of other family wealth to other family members.

Funding irrevocable trusts has significant transfer tax consequences. These trusts should only be prepared by legal counsel specially trained in drafting these documents, as they must meet strict federal and state laws to be effective, and with the advice of qualified tax counsel.

Selection of the trustee is important. While the grantor (parent or spouse) is typically the initial trustee, the trust document should provide for a successor trustee upon the death or incapacity of the initial trustee. Selection of an independent trustee (corporate or trusted friend) may alleviate potential conflicts of interest that may arise with a sibling or child serving as trustee. The trust document should clearly specify the grantors intent with regard to care of the individual and provide for the distribution of assets within the trust upon the death of the special needs individual.

We have worked with families having loved ones with special needs and their attorneys in designing, implementing, and funding special needs trusts and selecting appropriate assets with which to fund those trusts. We are prepared to work with your family in the same manner.

©2008 Ronnie C. McClure, PhD, CPA