What is a special needs trust?

When you have a child or children with special needs, you may have unique concerns about how to best prepare for your family's future. You want to do whatever you can to protect your children, particularly after you've passed away.

What is the role of a special needs trust in your financial outlook for their future? Here's some educational information as you decide whether this option is the right fit for your family.

A special needs trust can be one part of your overall special needs planning. It aims to preserve your beneficiary's eligibility for needs-based government benefits, such as Social Security, Supplemental Security Income (SSI), or Medicaid. Family members can set up special needs trusts to help ensure their loved ones continue to be eligible for this assistance while providing some additional help.

The special needs trust beneficiary could be someone who is currently receiving needs-based government benefits, or who may qualify in the future.

The trust will be administrated by a trustee, who must administer the funds in accordance with the terms and objectives of the trust. The trustee can be either an institution or a person—such as an attorney, trust company (such as Thrivent Trust Company), family member or professional trust manager.

The funds in special needs trusts can be used in a number of ways, including to cover the costs of education, travel and recreation, and assistive and electronic equipment. They aren't intended to replace government assistance programs but to supplement them. It's critical that you work with your attorney to understand the types of special needs trusts and how each might apply for your situation. Your attorney can also help you understand the beneficiary’s right to assets or income within the type of trust you decide to establish.

We will cover two different types of trusts: first-party and third party. The major difference lies in who funds the trust and what happens with the remaining assets once the individual with special needs passes away.

This type of a trust is funded with the beneficiary's own funds. When the beneficiary with special needs passes away, funds remaining may have to first be used to reimburse each state's Medicaid program from which the beneficiary received benefits, even if that means fully exhausting the assets in the trust. If there are remaining funds after Medicaid is reimbursed, the balance can be distributed to other remainder beneficiaries.

This type of a trust uses funds from someone other than the beneficiary. At the trust's termination, remaining funds pass to other beneficiaries, as directed within the trust document.

Both of these trusts are often funded with:

• Life insurance
• Cash (including gifts from relatives)
• Investments (e.g., stocks, bonds)
• Retirement plan benefits (e.g., pension benefits, IRA funds, 401(k) assets)
• Personal and real property
• Proceeds from a personal injury settlement (applies to self-settled trusts)

While special needs trusts can be a great fit for some families, they aren't a match for everyone. You can discuss the potential disadvantages with your financial advisor and attorney as you begin pursuing special needs trusts. Your financial advisor can work with you and your attorney to tailor a special needs plan that is appropriate for your situation.

• They can be expensive. Some of these trusts have annual fees and minimums to set up that could make them costly.
• Your beneficiary has no control over how the money is spent. That's a requirement for this particular kind of trust.
• You need a trustee that you trust. A trustee's wisdom and discretion will play an important part in this arrangement.
  

Creating a special needs trust can be an important step for any family as you try to care for the needs of your loved ones. It's worth putting significant thought into the process. Here are a few items to keep in mind.

Special needs trusts shouldn't be considered separate from your family's overall dedicated plan. Your ability to help your loved ones is usually tied to your own financial health. That means that other financial areas of your dedicated plan are relevant, including your retirement strategy, risk management and investment planning needs.

Special needs trusts can be complex, and the laws around setting up and administering these trusts vary depending on state. Find a qualified attorney to walk you through the process and requirements in your particular state.

Life insurance policies are an important way in which to protect what's important to you. Because life insurance may play a role in funding a special needs trust, it's important to have a policy that can meet the needs of your loved one. Our life insurance calculator can help you begin exploring your life insurance needs. You may also benefit from talking through your life insurance needs with a financial advisor.

Talk with one of our financial advisors to discuss how a special needs planning may fit into your dedicated plan.