top of page
  • Writer's pictureJohn A. White

The Importance of a Special Needs Trust: Ensuring Financial Security for Your Child

Updated: Aug 1, 2023

As a parent of a child with special needs, you understand the unique challenges and responsibilities that come with meeting their medical, social, emotional, and financial needs. One crucial aspect of their financial well-being is ensuring their eligibility for government assistance programs like Medicaid. A special needs trust (SNT) is a powerful tool that can provide financial security for your child while preserving their eligibility for these vital benefits.

Understanding a Special Needs Trust

A special needs trust is a legal arrangement designed to protect the assets of an individual with special needs. Typically established by a parent or guardian, this trust holds assets, such as money or a life insurance policy, on behalf of the child. The key advantage of an SNT is that the assets belong to the trust, not the child, which prevents them from being considered when determining eligibility for government benefits. The primary purpose of an SNT is to supplement, not replace, the government benefits received by the child.

The Value of Professional Legal Assistance

Navigating the laws surrounding special needs trusts can be complex, making it essential to seek guidance from an attorney experienced in this area. Each state has its own regulations regarding means-tested benefits, so working with an attorney who understands the specific laws in your state is crucial. If your child moves to a different state, it's important to have your trust documents and strategy reviewed by an attorney in that state to ensure compliance.

In addition to legal assistance, creating a letter of intent is highly recommended for parents or guardians establishing a special needs trust. While not legally binding, this letter provides instructions to individuals or organizations responsible for caring for your child in the future.

The Benefits of a Special Needs Trust

Establishing a special needs trust offers numerous benefits for both you and your child. Let's explore some of the key advantages:

1. Preservation of Government Benefits

One of the primary objectives of an SNT is to protect your child's eligibility for needs-based government programs like Medicaid. By removing the trust assets from your child's name, you can ensure that they maintain access to these critical benefits. This allows your child to receive the care and support they need without jeopardizing their financial stability.

2. Direction and Control of Asset Distribution

By creating an SNT, you can have peace of mind knowing that your child's assets will be used as intended. The trust documents and guidelines, along with SSA and IRS regulations, direct how the assets will be distributed. This protects the assets from misuse, potential creditors, or premature distribution in the event of your child's passing.

3. Facilitating Contributions from Others

Setting up a special needs trust enables grandparents, relatives, and other interested parties to contribute to your child's financial security. These individuals can make annual gifts to the trust, up to the allowable limits, without triggering gift or generation-skipping taxes. It's important to inform potential contributors to direct their bequests or gifts to the SNT to ensure seamless coordination.

4. Flexible Funding Options

Special needs trusts can be funded with various resources, including cash, securities, or life insurance policies. For many families, a second-to-die life insurance policy offers an affordable option to fund the trust without depleting other assets required for daily living expenses. If a significant portion of your estate consists of assets in an Individual Retirement Account (IRA), consult with an attorney to determine the most tax-efficient way to transfer those assets to the SNT.

5. Ensuring Appropriate Distributions

Creating and funding an SNT early in your child's life allows you to use the trust as a financial management tool. You can treat the trust like a checking account, using it to pay for your child's expenses. This establishes a record of payments, serving as a guide for future trustees to determine necessary and appropriate distributions that align with your child's unique needs.

6. Maximizing Personal Injury Settlements

In the unfortunate event that your child receives a sizable personal injury settlement, directing the payout to a self-settled special needs trust offers several advantages. By utilizing this trust, your child can still qualify for public benefits while using the settlement funds for nonessential expenses. Additionally, regular payments from the trust can provide long-term financial security for your child's future.

7. Enhancing Matrimonial Settlements

In the event of a divorce, a self-settled special needs trust can be drafted through the divorce decree, allowing any alimony or lump-sum payments from the ex-spouse to be paid directly to the trust. This preserves your child's public benefits while potentially reducing the financial burden on the ex-spouse. It can also facilitate smoother negotiations during the divorce process, ensuring that your child's financial resources remain intact.


Establishing a special needs trust is a crucial step in securing the financial future of your child with special needs. By working with a knowledgeable attorney, you can navigate the legal complexities and ensure that your child's eligibility for government benefits is preserved. Along with the advantages of asset protection and controlled distributions, an SNT allows others to contribute, offers flexible funding options, and maximizes the benefits of personal injury or matrimonial settlements. Take the necessary steps today to provide your child with the financial security they deserve while safeguarding their access to essential government assistance programs.

10 views0 comments


bottom of page