Special Needs Financial Planning

The Basics of Special Needs Trusts

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special needs trust, special needs financial planning, autism, Down syndrome, physical disability

When we think about planning for the future, we usually think about what we are going to have for dinner, or what we are going to do this weekend.  In some cases, certain individuals think about where they are going to take their next vacation or what they are going to do for the holidays, months in advance.  However, it is not that common for people to think years into the future.  There are so many variables that can derail, or change your path in life that planning too far could seem pointless.  Then there are certain moments in time that are relatively fixed points.  Those points, while distant, come with common questions like, “what am I going to do with my life when I retire?” or “when I die what legacy will I leave?”  It is this last question that creates an inevitable quandary for those of us with special needs children.  Parents who have been directly involved in helping a child throughout their life, wonder who will fill their shoes when they are no longer there.  This article will explore how a special needs trust can help you protect your loved ones from those that will eventually step into your shoes.


Purpose Of Special Needs Financial Planning

It is all too common for individuals to think planning for the future is simply a matter of time, cash flow, and an investment return.  At its root, that is what any form of financial planning involves.  However what can be lost on some are the nuances of the external forces that extend outside basic mathematical calculations.

Take retirement for example.  If you have a traditional two income household with, or without kids, then you are probably planning on a retirement for two people (barring a future child from moving back in).  But when you are an individual, or couple, with a special needs child your retirement is more likely going to include planning for three people.  That means adjusting spending patterns, required savings rates, time to retirement, and more.  Then once you retire you have to plan for another 15-30 years of living without a paycheck, but with your spouse and special needs child(ren).  For this reason, Special Needs Financial Planning requires additional finesse.

One important component of Special Needs Financial Planning, is legacy planning.  As you age and you are no longer able to perform the same tasks you once were, you need to think about how others in your life will be impacted.  As we age the questions we focus on are our health, enjoying the time we have left, and what will happen when we are gone.  It is therefore vitally important that you seek appropriate counsel with someone who understands special needs planning, like a special needs consultant and a special needs attorney.  These individuals can assist you in outlining the tools, resources, and strategies to protect your and your loved one.


The Role Of A Special Needs Trust

Trust planning is never fun.  If you haven’t had the conversation yet, it can pretty much be summed it up as, “when you die, where do you want all your crap to go?”  Sounds pretty morbid, but it is a fact of life.  It gets more interesting when you find yourself faced with the question of “what happens if my heir is receiving government assistance for a disability AND cannot manage what I give them?”  This is where thinking about how to setup the right trust for many unforeseen circumstances makes the most sense.

Do you know how many people know what their estate documents actually say?  Very few.  Now it isn’t really their fault.  At least I am giving them the benefit of the doubt.  If you have ever bought or refinanced a house, and were required to sign and initial a stack of papers, then you know that few people actually read every word on every page.  This is the same for most estate documents.  There is an implied expectation that the attorney who drafted the document knows what they are doing, and completely understands your ENTIRE situation so they should know exactly how to draft your estate documents.  Right?  Nope…

In many cases attorneys are very intelligent and do a great job, but what they cannot do is predict the future.  In other words, what is valid at the time of signing your estate documents may no longer be valid days, weeks, or months afterward.  In this case if you or a loved one becomes disabled, or is born disabled, and your documents do not account for this event, then that may be a real problem for that person in the future when you die.  This is where a special needs trust can offer some relief.

Special Needs trust planning is not as common as one would hope.  While we are not going to get into the finer points of establishing special needs trusts, it is important to know there are three primary trusts: a self-settled trust, a pooled income trust, and a supplemental needs trust.  Each of these trusts offer different advantages such as, but not limited to, asset protection for the beneficiary, limited to no reduction in government benefits, and ongoing financial support.  In the case of properly drafted self-settled and supplemental needs trusts, both can bypass the Medicaid look back rules that normally penalize people for gifting or transferring an asset to another person or entity within five years of needing financial support from Medicaid.

Self-settled trusts are usually designed and funded by the parent or grandparent of the special needs individual under the age of 65.  However, in late 2016 this rule was changed to allow a special needs individual to create and fund a self-settled trust on their own.  So what is so important about a self-settled trust?  Well at a high level, this type of trust allows the owner to place any funds in their name into this special trust.  Then once the funds are in the trust the independent trustee can use the trust funds to pay for items that supplement whatever government support, like Medicaid, that person receives.  Doing it this way means the funds can last longer because Medicaid picks up the majority of the pre-negotiated expenses during life.  Then at the individuals death, Medicaid is allowed to recoup all of the money it paid during the person’s life.  Since Medicaid rates can be cheaper than private insurance rates, depending on the investment strategy used in the trust, there is a chance additional funds could be left over to pass on to future heirs.

Supplemental needs trusts offer an added level of benefits but cannot be created by the special needs individual.  These trusts are usually created by close relatives either outright or through a provision in their revocable trust.  When drafted correctly these trusts provide supplemental support after government benefits are paid to the special needs individual.  Unlike the self-settled trust, if there are any funds left over after the death of the special needs individual, then those funds can be transferred on to other heirs per the trust document.

It is important to note that in the case of both trusts the independent trustee MUST NOT impugn the language of the special needs trust.  In the event that the trustee were to provide support for items such as food and shelter, then government benefits could be reduced, if not eliminated, for a period of time.  Therefore it is critical that the trustee of these trusts completely understand all of the rules associated with administering these special needs trusts.



It does not matter what stage of life you are in today.  It is your responsibility to ensure that if you plan to leave assets to someone in the future, that your actions do not negatively impact them from continuing to receive government support.  Special Needs Trusts can be a wonderful tool that can provide additional financial support, at the full discretion of the trustee, in order to improve the special needs individual’s quality of life.  To not work with a special needs consultant and a special needs attorney, or an attorney who understands special needs planning, could lead to financial problems for your loved ones in the future.


Content in this material is for general information purposes only and is not intended to provide specific advice or recommendations to any individual.


About Jon Peyton

Jon is an accomplished Senior Executive, Entrepreneur, and thought-leader with demonstrated success across the financial services, publishing, and exit planning industries. He has worked with thousands of clients and managed hundreds of millions of dollars spanning 20 years for multiple firms.

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