An important consideration when creating a special needs trust is that it must be set up to ensure that the beneficiary won't lose their government benefits, such as SSI and Medicaid.
How to Set Up a Special Needs Trust
If you set up the trust incorrectly, its entire contents will end up being paid out for the beneficiary's medical bills or other costs until the trust is depleted. But the trust will be there to ensure that your loved one is able to maintain a decent standard of living when you're no longer available if you do set it up properly.
Choose the Correct Structure
- Revocable Trust: A revocable trust might be helpful if you think you want or need to take its assets back out at any point, but it's also subject to claims by creditors. It requires that you, the grantor, pay taxes on its income. But revocable trusts aren't subject to the probate process.
- Irrevocable Trust: Setting up an irrevocable trust means that you can't change your mind later and access any of the funds or alter any of its terms. These trusts avoid the probate process, too, and they're also not subject to estate taxes or claims by creditors. They pay their own income taxes.
Where you establish your trust can affect the form it must take. For example, New Jersey state laws dictate that special needs trusts must be irrevocable and for the sole benefit of the designated beneficiary.
Open a Special Needs Trust Bank Account
You must establish a special needs trust bank account for the beneficiary. The complications involved in forming a special needs trust make it advisable to seek the assistance of an experienced attorney. A simple mistake could cost the beneficiary all their government benefits and the cash in their trust fund as well.
Check with the Bar Association in your state for a referral service that can help you find the type of lawyer you need.
Set Up the Trust
Determine the terms to be included in the trust. Consider that it must be established by someone other than the beneficiary in most states. It must be managed by a trustee who can use their discretion when providing funds to the beneficiary. It should make clear that the trust cannot pay out more in benefits than the government allows.
Also, ensure that you fill the right forms for your state. For example, you must complete a special needs trust Texas form if you're setting the trust up in that state.
You can sign the final version of the trust documents when you've set up the trust. Trust documents are legal forms and must be signed and notarized in front of witnesses.
Choose the Trustee and Custodian
Choose a trustee to manage the account and a custodian to hold the assets. You can be the trustee if you set up a revocable trust, but your trust documents should also assign a successor, such as a sibling or another trusted relative, to take over should you die or become incapacitated. The custodian is typically a bank that holds the funds in an account for the benefit of the beneficiary.
You can select the custodian by creating a savings account at a bank, credit union or other financial institution. This account must be placed into the trust so it won't belong to an individual but instead will belong to the trust itself.
In most cases you can add to this account at any time, but you may no longer have access to those funds after you deposit them there. Build the account so that there will be enough money in the trust to care for your loved one after you die.
Consider adding a life insurance policy to the special needs trust to provide an additional source of funding for the beneficiary in the future.
You should consult with an attorney to make sure it complies with the law in every detail when setting up a special needs trust and its savings account. You run the risk of the trust not being recognized otherwise and the beneficiary would then lose their benefits.
- Consider adding a life insurance policy to the trust, to provide an additional source of funding for the beneficiary in the future. Making it part of an irrevocable trust will offer tax benefits to your beneficiary.
- When setting up a special needs trust savings account, you should consult with an attorney to make sure it complies with the law in every detail. If you don’t, you run the risk of the trust not being recognized and the beneficiary would then lose her benefits.