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Your Complete Guide to Establishing a Special Needs Trust

Your Complete Guide to Establishing a Special Needs Trust
A special needs trust can help care for a loved one with special needs

Establishing a special needs trust (SNT) for a loved one with a disability is one of the best ways to help them financially while still ensuring they receive government benefits. Without having the knowledge or experience with this type of trust, it can be overwhelming. This guide will provide answers to the following: What is a special needs trust? How do they work? Why should you create a special needs trust for your loved one? How does one set up this type of trust successfully?

What is a Special Needs Trust?

This type of trust is established specifically for those with a physical and/or mental disability. Also referred to as a supplemental needs trust, an SNT is created with the needs, lifestyle, and future of the disabled loved one in mind. More often than not, it’s crafted to help the beneficiary receive both government and trust funds, and can also serve as a protection against financial abuse by providing direction to ensure the funds are spent wisely for current and future use.  

What Can a Special Needs Trust be Used For?

Typically, these trusts are used for supplemental items that improve the quality of life, and include paying for personal care, attendants (related to health), vacations, home furnishings, out-of-pocket medical and dental bills, education, transportation (vehicle), and rehabilitation.

How Do They Work?

Similar to all trusts, an SNT is a legal agreement between three parties:

  • Grantor, the person creating the trust and supplying the money and assets
  • Beneficiary, the person with the disability
  • Trustee, the person who manages (and has sole discretion) of the trust on behalf of the beneficiary

Furthermore, the trustee is obligated to provide distributions to the beneficiary as outlined in the trust. The beneficiary or another family member can have the trustee removed should they fail to meet this duty.

They Can Affect Supplemental Security Income (SSI) and Medicaid Benefits

Caring for a person with special needs means that they probably receive government assistance from SSI, Medicaid (Medi-Cal in California), In-Home Support Services, and HUD housing. Setting up a special needs trust will ensure that your loved one can still receive the full benefits from these programs as any assets in the trust won’t be counted towards the asset limit.

Should the beneficiary receive any of the above benefits, the wording needs to be very specific and include:

  • The trustee is responsible for when and how to use the funds to benefit the beneficiary;
  • The main purpose of this trust is to supplement the support the beneficiary receives from the government and public benefits;
  • The beneficiary can’t sell or give away his/her trust rights. Nor will he/she ever have control of the assets.

In addition, distributions of these trusts are usually paid on behalf of the beneficiary instead of directly to him/her. Otherwise, these funds would count against SSI and result in a dollar for dollar reduction after $20.

The best way to guarantee the SNT is set up properly is to meet with a special needs trust attorney.

There’s No Minimum Amount Required

The amount of money will depend upon a few key factors: the nature of the disability and level of required care. This means that this trust can range from tens of thousands of dollars to millions.

While there is no minimum required, due to the set-up and manage costs it’s typically recommended to have at least $100,000. This amount can be collected from family assets, inheritance, settlements, or life insurance policies.

5 Reasons Why You Need to Create an SNT

Establishing a special needs trust plays a crucial role in helping families plan for a loved one with special needs. Below are some of the top reasons why it’s encouraged to set one up:

1. Supplement Care Above and Beyond What is Provided by the Government

While those with special needs oftentimes receive support from Supplemental Security Income (SSI), Medicaid, and other government funds, these programs only provide basic, essential support, and rarely are they adequate. An SNT will allow family members to provide additional funds to enhance the quality of life.

2. Better Than Leaving Money to Another Sibling for Their Care

This trust guarantees that the distribution of assets and funds will be used for the intended purpose. It does so through terms directed from the actual trust in addition to the SSA and IRS. These government agencies have specific guidelines that an SNT has to follow for correct distribution.

Simply leaving assets to another sibling can lead to several problems including the failure of the sibling to care for the loved one with special needs, loss of assets to creditors, premature death resulting in funds going to his or her children instead of the sibling needing the assistance.

3. Maximizes Benefits of Personal Injury Settlement

If the disabled loved one wins a big settlement and the payout is a lump sum of money, directing that into a special needs trust will ensure that those funds can be used for non-essential expenses to improve quality of life while also providing peace of mind and financial security by receiving regular payments.

4. Supplemental Security Income (SSI) and Medicaid have Strict Income and Asset Requirements

SSI only assists those with low income who have special needs. In order to receive SSI benefits, one can only have $2,000 to his/her name (with a few asset exceptions). Should that number increase for any reason (savings, inheritance, or accident settlement), that funding could decrease or even stop. Medicaid works similarly and will only provide funds to those with low income and assets.

As mentioned earlier, SNT’s will allow the beneficiary to retain government benefits and still use his/her own funds when needed.

5. It Helps the Beneficiary Protect the Funds and Use Them Wisely

Oftentimes a loved one with physical and/or mental special needs is unable to manage money appropriately. Setting up a special needs trust allows a third party to manage the funds on their behalf to ensure the funds are spent wisely on things the individual needs and wants.

How to Set Up a Special Needs Trust: Step-by-Step

Signing of a special needs trust

The steps required are fairly straightforward; however, before doing so there are three items you’ll need to understand:

1. Decide the Amount of Money to Put in the Fund Based on the Level of Care Required

What type of care is required for your loved one? How old are they? Do you want this fund to last them their entire life? These are just some of the key questions to ask when determining the amount of money to put into an SNT. Take into account the current and likely future state of the disabled persons’ health and ability to care for him/herself, then determine the level of future care required for both essential and desirable living.

Having this conversation with family members, doctors, and financial planners can help in deciding the appropriate amount.

2. Choose the Best Special Needs Trust Type According to Need

In addition to the amount of money, it’s important to consider which type of trust will greatly benefit the beneficiary.

Third Party Special Needs Trust

Created and funded by a third party (typically a friend or family member), a third party special needs trust can be set up in two ways, both of which benefit the beneficiary:

  • Sub-trust of a parent’s Revocable Living Trust: This won’t be funded until the death of that parent and should be set-up when a parent wants to leave money to their child and no other relatives do. This is great for future planning.
  • Single Stand-alone Trust: This is used when relatives want to provide cash gifts throughout the lifetime of the disabled individual. These funds can be used immediately.

The assets in a third party trust can never have originally belonged to the beneficiary. The family member or friend must sign the trust then transfer the assets over to the trustee.

It’s important to also note that funds in a third-party special needs trust cannot be used for housing or food, without giving up certain benefits, only towards improving quality of life. Another great benefit to the third party SNT is that upon the death of the beneficiary, there is no y Medi-Cal payback. The remaining assets can be left to the beneficiary of your choice.

First Party Special Needs Trust

This type of trust is established with assets that originally belong to the beneficiary. They are commonly used for personal injury settlements, outright inheritances, or for individuals with substance abuse problems. Previously, the trust document could only be established by the beneficiary’s parent, grandparent, or the court, however now an individual with capacity can execute their own first-party SNT.

Once this trust is signed, the assets can then be transferred over to the trustee. The downside to the first party SNT is that upon the beneficiary’s death, Medi-Cal will be entitled to repayment for certain expenses paid. If funds remain thereafter, they will go to whomever the beneficiary chose.

Pooled Special Needs Trust

Collecting assets from different relatives and friends (even the disabled loved one), a pooled special needs trust will be put into a large investment fund. Still having separate accounts, pooled trusts can have first-party accounts which are funded from the benecificay’s own money and third-party accounts which are funded with money from other people.

The main difference from this type is that it’s set-up through a non-profit organization who administers the pooled trust, takes care of taxes, makes investment decisions, and acts as the trustee.

A pooled special needs trusts can be less expensive to administer, however, many individuals prefer to work with a trusted family member trustee rather than an organization. Upon death of the beneficiary, any remaining money in a first party pooled SNT will be used to pay back the State Department of Health Care Services. Typically, a percentage of the remaining balance will go to the nonprofit. If funds remain, then they can go to whomever the individual selected at the time they joined.

3. Ensure your Family has a Special Needs Attorney to Protect the Assets

Special needs trusts are a complicated but important need to address sooner rather than later. If you or your family is looking to set one up, you might want to consider meeting with professionals who specialize in special needs to ensure all of your bases are covered and the trust is set-up properly. If you fail to plan and create a third party SNT for your beneficiary, they may have to petition the court to modify your trust to place those assets in a third party SNT, which is permitted in limited circumstances. Alternatively, the beneficiary may lose their benefits or may fund a first party SNT, which will require Medi-Cal payback provisions.

Start Working With a Special Needs Attorney in San Diego

Meeting with a special needs attorney who knows how to navigate the system can help to answer all of your questions and prepare an SNT that will meet your exact needs. Plus, these attorneys might be able to provide additional resources that will help in this journey including contact information for financial planners skilled in special needs planning and personal referrals to others who are in a similar situation.

Looking to start right now? Call Kam Law Firm for a free consultation today!


Every case is unique, and no special needs trusts are ever the same. Our experienced special needs attorneys work closely with our clients to ensure that they receive the personalized attention they deserve. If you have any questions or are in need of a special needs attorney in San Diego, please call Kam Law Firm today at 619-535-1405.

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*Does not create an attorney-client relationship. An executed representation agreement is required to create an attorney-client relationship. Call for more information.

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