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Wealth Planning

Providing for children with special needs

It can be important to structure gifts to a special needs beneficiary if you don’t want the beneficiary to be disqualified from receiving government benefits.

Structure gifts to beneficiaries with special needs without jeopardizing their ability to receive government benefits.

If you would like to provide financially for a child with special needs, you may want to do so in a “Supplemental Needs Trust” or “Special Needs Trust” (SNT). It is very similar to a regular trust, but it can provide for your child’s needs without jeopardizing your child’s ability to qualify for need-based governmental benefits.

Trust basics

A trust is usually created by the “grantor” of the trust—the person who provides the funding. For children with special needs, the grantor is usually the parent or guardian of the child, although there are times when it may be the child.  A trustee is the person the grantor names to be in charge of the trust. The trustee is mainly responsible for investing trust assets (or hiring someone to invest them) and making (or withholding) distributions to the trust’s beneficiary. The beneficiary is the person or people for whom the trust is created.

Sometimes, parents want to set money aside for a child who they believe cannot handle money independently, but who isn’t likely to qualify for government benefits as the result of a physical or mental disability. This type of set-up would be a standard trust with restrictions on when the child can receive distributions.

This WealthFocus deals specifically with the trust provisions for parents who want to make sure their children can qualify for disability-related government benefits.

Special needs provisions

The purpose of creating a special needs trust is to provide funds for your child while at the same time preserving your child’s ability to qualify for need-based governmental benefits, most commonly Social Security Disability Income (SSDI) or Medicaid. An individual does not need to be a minor to have a special needs trust, but there are special rules for additions to a trust for a beneficiary who is age 65 or older.

In most cases, government benefits require the recipient to have no more than a certain amount of assets or income or both in order to qualify. Children with physical or mental disabilities who would otherwise qualify for benefits might not qualify if they either inherit or are given assets from their parents outside of a trust structure, or if they receive a settlement as the result of, for example, medical malpractice, an accident that caused their disability, etc.

The government generally looks at assets in a standard trust that can be spent on behalf of the person with a disability as that person’s income or assets, which would usually disqualify the beneficiary from receiving government benefits.

A special needs trust generally has to be set up so that distributions for the person with a disability can only be made to supplement, rather than to substitute for, benefits received from the government. Additionally, for trusts that the beneficiary funds on their own (usually with the proceeds of a settlement), the trust must require that when the person with a disability dies, the trust will reimburse the government (usually the state where the person lives) up to the amount of benefits that the government provided during the person’s lifetime, with any excess assets passing under the terms of the trust. Finally, the trust will often specify certain expenses, like extracurricular activities for the person with a disability, that should be paid for with distributions.

In some states, trustees are allowed to make distributions that would jeopardize the beneficiary’s ability to qualify for government benefits if the trustee believes the beneficiary would be better served by receiving the distribution—as long as those distributions are authorized by the trust document.

Creating a trust for your child

Special needs trusts are most often drafted as part of a parent’s will or revocable trust and only take effect on the parent’s death, since the parent is likely to take care of the child’s needs during the parent’s lifetime. Frequently, but less often, they are created by parents who want to set aside money during their lifetimes to supplement the benefits their child is receiving.

Special needs trusts settled by someone other than the child can be somewhat more flexible in the way distributions are made for the child since the money funding the trust was never the child’s money. The creator of the trust can determine what happens to the balance of the trust’s assets, if any, when the beneficiary dies, since there is no requirement to reimburse the state government for the benefits the child received.

Trusts funded by the child

When the child is going to receive a settlement, the child, often acting through their parent or legal guardian, creates and funds a trust for their own benefit. Trusts that are settled by the beneficiary need to be drafted very carefully to make sure that the child with a disability does not retain any authority over trust assets that would cause them to be disqualified from receiving government benefits.

Further resources

Special needs trusts are fairly technical. It is a good idea to make sure your attorney is very familiar with their operation. If you don't have enough money to warrant a separate trust, certain organizations can also provide pooled special needs trusts.

J.P. Morgan advisors are here to assist you in thinking about making gifts to a child with special needs, but you should always engage independent legal counsel before undertaking any sophisticated planning.






This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). The views and strategies described in the material may not be suitable for all investors and are subject to investment risks. Please read all Important Information.