Supplemental Needs Trust: What a Special Needs Fund Is and How to Set One Up

Trisha Miller
What a Special Needs Fund Is and How to Set One Up

If you have a special needs child or family member, you might be wondering what kinds of actions you can take to secure income for your loved one. Luckily, there are a few accounts that you can get started in order to help your loved one receive the finances they need throughout their life. In this guide, we’re going to go over what a special needs trust is, different types of special needs trusts, how to fund them, what they can be used for, and what kind of legal assistance you might need in order to get one up and running.

Table of Contents

What Is a Special Needs Trust?

A special needs trust is a fund set up with the purpose of supplementing a special needs individual’s income. A trust can contain many different types of assets, like various properties (a home, a car, etc.) or it can simply contain money. The fund will be assigned to a trustee, a person that will be in charge of monitoring the fund and dispersing funds as necessary. They will ensure that the beneficiary (the person receiving the money) is adequately funded for as long as they need it or until the funds run out.

First-Party Supplemental Trusts

These trust funds are created to accommodate assets in your loved one’s name. These might be gifted assets, property, or settlements that are required to be placed in that individual’s name and not in the name of a trustee. When you set up a first-party trust, these assets can be transferred into the fund instead and can be designated as supplementary income for the special needs individual. The reason for this, is that assets that stay outside of a fund and are in his or her name may greatly affect their eligibility for government benefits. The state may see the assets in this person’s name as something that can be immediately used to remedy their financial situation. However, if you want to set them up for life, it’s a better idea to put those assets into a trust.

Third-Party Supplemental Trusts

Third-party trusts are funds created by someone other than the special needs individual. Usually this is a family member, like a parent or legal guardian, that puts their own assets into the trust fund for their child to use throughout their life. This can include retirement funds, savings accounts, life insurance, inheritance, and more.

In addition, there are trusts called “pooled trusts” which are created by third-party non-profit organizations. These accounts receive donations from the community and/or other organizations. Individuals are then given their own accounts to house their funds and the pooled money donated to the organization is split up fairly between all needy individuals. In these cases, it’s common for many different families to be involved in a single community “pool”. However, each person’s money is secured separately into their personal account and they are assigned an individual trustee that helps each family.

Why Do You Need a Special Needs Trust Fund?

Someone who is seen as independent or semi-independent by the government may need financial assistance throughout their adult years. Even if a special needs individual is receiving financial benefits from the government, it might not cover everything. In many cases the financial benefits they are receiving are just not enough to cover things like bills, rent, food, clothing, etc. Government benefits are intended to be used to cover the most basic essentials of a person’s life. It does not stretch beyond that. So, in order to protect your loved one into their adult years and throughout their life, a trust fund is a great idea.

How Special Needs Trust Money Can Be Spent

Trust funds can be spent in a variety of ways. Since it is labeled as supplementary funds intended to provide extra care, a trust fund can be used on quite a lot of things. For example,  medical bills, vacations, education, recreation, buying a home, buying a vehicle, home furnishings, personal care attendees, dental work, and physical rehabilitation are all good examples of ways the money can be spent.

How to Set Up a Special Needs Trust

Funding a Supplemental Needs Trust

Many different assets can be used to fund a special needs trust. Individuals may fund the trust with their personal savings account, investment accounts, retirement funds, inheritance, gifted funds, a life insurance policy, owned property, and more. In several scenarios, like an inheritance or life insurance policy, you will want to list the name of the special needs trust as the beneficiary for those accounts. This process may involve the accounts being taxed in certain circumstances, especially if funds are being removed from an account early. As such, this can be a complicated process and it might be a good idea to bring in a lawyer that is familiar with special needs accounts.

Appointing a Trustee

As we briefly touched on earlier, it’s necessary to set up the fund in someone else’s name. The reason you want to do that is to protect additional benefits that the beneficiary is entitled to. For example, if the trust is assigned directly to someone with special needs, the government will see that as a form of income and they may automatically become ineligible for financial benefits that they may have previously qualified for.

You might want to choose someone close to you that understands your loved one’s situation in detail, but you also have to think about the financial aspect as well. This person will be in charge of these funds and will need to know how to spend them wisely and in the best interest of your loved one. They’ll have to be comfortable at financially planning ahead for years to come. In some cases, you may be able to find a friend, family member, or guardian that can fulfill that role. In other situations, if you’re uncomfortable with making that decision, it might be a better idea to find a trained professional that is well-versed in special needs trusts. There are many agencies out there that operate for this particular reason. They have years of experience in maintaining and disbursing special needs funds. As such, by choosing a person from an agency like this, you’ll know you’re in good hands and will be for the entirety that the trust is open.

Will You Need a Lawyer to Set Up a Trust?

While it’s not required to have a lawyer set up your trust for you, but it’s a smart idea to do it anyway. There are many legalities involved in the process and preferred language that should be used when setting up the fund. As such, a lawyer can handle all of those details and you won’t have to stress about it. In addition, some types of funds, like settlements, that are being added to the fund have very particular rules and regulations surrounding them. If you feel confident in your ability to handle all of the details, you can definitely do it yourself. Otherwise, I highly suggest that you talk with a lawyer.

Hopefully now you feel a lot more confident about getting a special needs trust fund started for your loved one. Depending on your specific situation, you might decide to go with a first-party, third-party, or pooled trust fund. Whatever the case may be, each of these provides an excellent solution for your loved ones who require financial assistance and will continue to rely on those funds for years to come.

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