How To Set Up A Special Needs Trust For Your Grandchildren

Planning your financial legacy is an act of care, especially when a grandchild has disabilities. Many individuals seek ways to offer long-term protection, and a special needs trust can be an effective tool. 

This guide provides a look at how to put this protection in place. In plain language, you’ll find a breakdown of each step, common pitfalls, and key points to consider.

Why Consider a Special Needs Trust for Your Grandchildren? 

Short-term solutions may not cover all the future expenses for a grandchild who needs ongoing support. Setting up a special needs trust (SNT) is a way to plan for the future while providing flexibility. 

Key reasons many people take this route:

Financial Security: An SNT can serve as a safety net that covers costs exceeding what other resources might provide. It allows your grandchild to have access to funds for medical needs, daily living expenses, or special activities that enhance quality of life.

Supplemental Support: When created correctly, an SNT does not threaten other forms of aid such as public benefits programs like supplemental security income (SSI) and Medicaid provided to a grandchild with a disability. For this reason, an SNT is sometimes also called a “supplemental needs trust.”

Protection of Assets: Because a special needs trust can be structured to hold the beneficiary’s assets—rather than having the beneficiary hold them directly—those assets can be protected from creditors and legal judgments. With this structure, the probate process is also bypassed, reducing complications in estate management and preserving privacy.

Long-Term Approach: Because the trust’s assets are set aside for ongoing care, they can adapt as your grandchild’s needs change over time. This approach promotes a solid, enduring foundation that preserves consistency and stability over the long term.

 

How a Special Needs Trust Can Supplement (Not Replace) Government Benefits 

A special needs trust provides for beneficiaries in many different ways. As long as it is created properly, the trust can be used to pay for items or services that extend well beyond government assistance programs.

Common examples of SNTs that provide additional support include:

• Healthcare: Services not covered by regular plans, like specialized treatments.
• Educational Costs: Tuition or materials for classes that promote skills or enjoyment.
• Transportation: Modifications to vehicles or private rides for appointments.
• Leisure Activities: Hobbies, recreational trips, and more.

Types of Special Needs Trusts

There are multiple variations of SNTs, each designed to address specific circumstances. By understanding the different types of trusts, you can choose a structure that most aligns with the beneficiary’s resources and long-term needs.

Here are three main types of SNTs:

First-Party Special Needs Trust: This arises when the beneficiary’s own assets are used. This might happen if a person receives a legal settlement or has their own savings. Regulations require that any remaining funds in such a trust typically go back to the state when the beneficiary passes away.

Third-Party Special Needs Trust: Typically, someone else—frequently a grandparent, parent, or another close relative— establishes and finances these accounts on the beneficiary’s behalf. Because the assets never legally belonged to the beneficiary, this trust won’t face Medicaid payback requirements in most cases. It’s also a favored structure for estate planning.

Pooled Special Needs Trust: These are run by nonprofit groups and combine multiple beneficiary subaccounts. The advantages often include professional management and potentially lower fees, though each sub-account is still used for each individual’s benefit.

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

The process of creating and funding an SNT can be complicated. Thankfully, by breaking it down into actionable steps, you can move through the creation more efficiently and properly.  

 Consider taking the following steps:

Step 1) Consult with Professionals: Seek out individuals who focus on elder law and trust structures. Look for those who have experience working with families in similar situations. Cooperation between legal and financial advisors can help create a balanced plan.

Step 2) Determine the Source of Funding: You and other family members might contribute assets. Decide whether you’ll transfer property during your lifetime or upon passing (via a will). Remain mindful of gift and estate tax rules and potential impacts on your contributions.

Step 3) Select a Trustee: Choose a friend, relative, or corporate trustee. This person or entity should be comfortable handling finances and attentive to the beneficiary’s needs. The trustee is empowered to manage expenditures and oversee investments for the beneficiary’s benefit.

Step 4) Outline the Trust Terms: Specify the types of costs the trust will cover, such as therapy, activities, or transportation. Clarify how funds will be distributed or managed over time. Provide clear directions to guide the trustee’s actions.

Step 5) Complete the Legal Documents: Work with an attorney to draft and finalize the trust paperwork according to state requirements. Sign and authenticate the documents as needed. Update the trust if your family’s circumstances or relevant regulations change.

Step 6) Fund the Trust: Contribute cash, real estate, or other assets. Some grandparents purchase life insurance that names the trust as the beneficiary. You can add assets all at once or gradually, depending on your preferences.

Common Mistakes to Avoid When Setting Up a Special Needs Trust 

Setting up a special needs trust can be more complicated than a standard trust. For this reason, it’s particularly important to know about common mistakes upfront. 

Make sure you watch out for the following:

Wrong Language: The wrong language can undermine the trust’s ability to work as it was originally intended. For example, if the trust document includes phrases giving direct control to the beneficiary, it can cause them to lose eligibility for  life-saving government benefits. 

Not Keeping the Trust Funded: Having an unfunded trust defeats the purpose of setting it up in the first place. Regularly reviewing and contributing assets allows the trust to remain operational and beneficial.

Forgetting Updates: Regulations and personal circumstances can change at any time. Updating your trust documents helps maintain alignment with your beneficiary’s evolving needs.

Inappropriate Trustee Selection: A trustee who lacks the knowledge, time, or willingness to learn may struggle to manage the trust properly. Selecting someone experienced can make all the difference in meeting your beneficiary’s best interests.

Tax Considerations for Special Needs Trusts

A well-structured trust has its own tax identity. That means it may file its own return, depending on whether it generates income.

Tax points to remember include:

Income Tax: Trust earnings might face higher rates if they remain undistributed. The trustee can explore distributions that help minimize the overall tax burden.

Gift and Estate Tax: When adding assets, consider gift and estate tax limits, as these trusts can help lower potential tax burdens. If the beneficiary or grantor has a larger estate, planning ahead can prevent unpleasant surprises.

Funding Over Time: Some families spread out contributions to avoid larger tax issues in any single year. This approach also allows for more flexibility as needs change over time.

The Potential Role of Life Insurance in Funding a Special Needs Trust 

Life insurance can be a practical approach for making sure a special needs trust has the resources it requires. By choosing a policy that funds the trust upon your passing, you establish a steady financial source for your loved one over the long term.

When comparing policy options, consider different types of life insurance. For instance, a second-to-die policy may appeal to those looking for lower premiums and a payout that becomes available precisely when it’s needed—only after both policyholders have passed.

It’s best to name the special needs trust—not an individual—as the beneficiary because doing so helps preserve eligibility for government programs while still providing meaningful support. Moreover, make sure premiums are set up in a way that fits your budget, whether monthly or annually. 

How to Manage a Special Needs Trust Over Time

Once the trust is in place, ongoing management becomes the trustee’s job. This person (or entity) invests the trust funds, tracks expenses, and makes distributions that fit the terms you set.

 Common practices for maintenance involve:

Regular Reviews: Scheduling an annual (or more frequent) review helps confirm that the trust is meeting the beneficiary’s evolving needs. Updating documents or distributions when circumstances change can align everything with the trust’s objectives.

Detailed Records: Maintaining receipts, bank statements, and other financial documents provides transparency. Maintaining thorough documentation demonstrates responsible use of resources in line with the trust’s requirements, protecting the trustee.

Open Communication: The trustee should coordinate regularly with caregivers, family members, and professionals who understand the beneficiary’s needs. This ongoing communication certifies that the trustee remains aware of changing requirements and can adjust distributions accordingly.

Professional Guidance: Collaborating with a legal or financial specialist in special needs planning provides the trustee with valuable insight and guidance to stay on top of complex regulations effectively. Professional input also helps anticipate and avoid costly mistakes or compliance issues.

Frequently Asked Questions About Special Needs Trusts 

How much should I fund the trust with?

That depends on your family’s goals and the beneficiary’s future needs. Some choose to leave enough for extensive medical or educational support, while others prefer smaller amounts.

Can the trust be revoked or changed?

A third-party trust is typically created as an irrevocable entity, meaning major changes are not always possible. However, minor updates may be allowed, depending on the language in the document and local rules.

What happens if assets remain after my grandchild passes away?

It varies. In a first-party trust, any leftover amount may go to the state to reimburse public programs. In a third-party trust, leftover funds can go to other heirs, depending on the instructions.

Can the funds within the SNT be used for living expenses for housing?

Yes, but proceed with caution. If the trust pays for shelter or food, the Social Security Administration considers this In-Kind Support and Maintenance which could impact SSI. You could consider opening an ABLE account for certain expenses if protecting government benefits is a key consideration.  

Securing Your Grandchild’s Future Through a Special Needs Trust 

Caring for a grandchild with one or more disabilities involves more than meeting today’s requirements—it’s about thinking ahead. A special needs trust allows resources to be properly managed and structured to support your loved one well into the future. By carefully designating how funds should be used, you can maintain your grandchild’s eligibility for government programs while still providing extra support for life-enhancing opportunities.

Putting a trust in place might seem complex at first, but expert guidance can simplify the process. The key is to focus on both the legal aspects and the personal considerations that shape your family’s needs. Proper trust language, a reliable trustee, and thoughtful funding strategies all work together to create a secure safety net your grandchild can rely on.

When you’re ready to take the next step, we invite you to schedule a complimentary consultation with our financial advisory team. We’ll discuss your goals in detail and guide you through creating a special needs trust that’s a best fit for your grandchild(en).