Special Needs Trusts: How to Protect Your Child’s Future Without Risking Their Benefits

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As a parent, securing your child’s future is one of the most important tasks you undertake, but if you have a child with special needs, planning ahead carries unique challenges. Many families don’t realize that leaving an inheritance or other resources directly to a child with disabilities can jeopardize their eligibility for crucial government programs, such as Medicaid or Supplemental Security Income (SSI). This is where a special needs trust (SNT) can be an invaluable tool. By placing assets in a special needs trust, you can ensure that your child’s future is protected without risking the benefits they depend on.

In this guide, we’ll cover what a special needs trust is, why it’s essential for protecting benefits, how it works, and how to get started with setting one up in Texas.

What is a Special Needs Trust?

A special needs trust (SNT) is a type of legal arrangement that holds assets for the benefit of a person with disabilities, without those assets counting as part of the person’s financial resources. By creating a trust that is managed by a third party—called a trustee—you’re able to provide for your child’s additional needs without impacting their eligibility for government assistance.

There are two primary types of special needs trusts:

First-Party SNT: Created using the beneficiary’s own assets (like a settlement or inheritance). This type of SNT is usually established by a parent, guardian, or the court and can ensure the child remains eligible for benefits. However, it may require repayment to Medicaid upon the beneficiary’s death.
Third-Party SNT: Funded by assets that don’t belong to the beneficiary, such as gifts or inheritances from family members. This type does not require Medicaid repayment, making it ideal for parents who wish to provide long-term financial support.

Creating an SNT helps you provide your child with financial support without the risk of losing essential benefits.

Why Traditional Inheritance Poses Risks for Benefits

If your child receives government assistance, directly inheriting assets or receiving large gifts can result in the loss of those benefits. Programs like Medicaid and SSI are “means-tested,” meaning that recipients must have minimal financial resources to qualify. Exceeding these limits—even unintentionally—can lead to disqualification, impacting healthcare coverage, housing assistance, and more.

Example Scenario: Imagine a grandparent leaves your child an inheritance as a well-meaning gesture. While the gift might provide immediate financial relief, it could also push your child’s assets over the threshold for Medicaid or SSI, resulting in a sudden loss of benefits. In this case, the inheritance could do more harm than good.

By creating an SNT, you can ensure that any inheritance or resources intended for your child will not interfere with the benefits they rely on for long-term care.

How a Special Needs Trust Can Protect Benefits

The primary advantage of an SNT is that assets held in the trust do not count toward the beneficiary’s financial resources. Here’s how it works:

Exclusion from Asset Limits: Assets placed in an SNT are owned by the trust, not the individual, meaning they aren’t considered in benefit eligibility calculations. This protection allows your child to receive financial support from the trust without endangering their eligibility for Medicaid, SSI, or other assistance.
Permitted Uses for SNT Funds: While assets in the trust can’t be used for basic needs like food or housing (covered by benefits), they can be used to improve your child’s quality of life. This includes medical expenses not covered by Medicaid, therapy, educational opportunities, transportation, and recreational activities.

Setting up an SNT provides you with peace of mind, knowing that your child’s financial future is safeguarded, and their government benefits remain intact.

Choosing the Right Trustee

Selecting a trustee is one of the most critical decisions when establishing a special needs trust. The trustee’s role is to manage the trust responsibly, make distributions that comply with legal requirements, and act in the best interest of your child.

Qualities to Look For:

Responsibility and Reliability: Look for someone you trust with financial management who understands your child’s needs and government benefit requirements.
Familiarity with Special Needs Trusts: An ideal trustee understands the legal aspects of SNTs and will ensure distributions comply with eligibility rules.
Knowledge of the Beneficiary’s Needs: If possible, the trustee should have a strong understanding of your child’s specific needs and preferences.

Options for Trustees:

Family Member: A close family member may have personal insight into your child’s needs, but they may need legal guidance to manage the trust properly.
Professional Trustee: Lawyers, banks, or trust companies with expertise in special needs trusts can provide legal and financial management but may lack the personal connection.
Combination Trustee: Consider combining a family member with a professional trustee for both personal and financial oversight.

The right trustee will play a pivotal role in protecting your child’s future and ensuring the trust is managed according to your wishes.

Key Steps to Setting Up a Special Needs Trust in Texas

Consult an Experienced Attorney: Special needs trusts involve intricate state and federal regulations, so working with an attorney experienced in SNTs and estate planning is crucial. A knowledgeable attorney will ensure your trust is established according to Texas law and fits your family’s needs.
Define the Trust’s Purpose and Beneficiary Needs: Discuss your goals for the trust with your attorney. Outline what the trust should provide and any specific needs or interests your child may have.
Select the Type of Trust: Based on your situation, choose between a first-party and third-party SNT. First-party trusts are beneficial if your child already has assets that need protecting, while third-party trusts are ideal for those wanting to provide financial support through gifts or inheritance.
Choose a Trustee and Establish the Terms: Carefully select a trustee, and outline how the funds should be managed. Include guidelines on how to handle common expenses, such as medical bills, therapy, education, or entertainment.
Fund the Trust: After setting up the trust, fund it with assets you intend to provide, whether immediately or through your estate plan. Consider involving other family members who may want to contribute to the trust in the future.

Setting up an SNT may seem complex, but each of these steps helps ensure that your child’s future is secure and their eligibility for assistance is maintained.

To learn more about exception trusts and how they can protect eligibility for Medicaid and other benefits, you can review the Texas Health and Human Services guide here.

Take the Next Step to Protect Benefits That Your Child Needs

Creating a special needs trust is one of the most meaningful steps you can take to protect your child’s financial future without jeopardizing essential benefits. With a properly established SNT, you can rest assured that your child will have the resources they need to enjoy a full life without the risk of losing critical support.

If you’re ready to take the next step in securing your child’s future, the team at Hailey-Petty Law Firm is here to help. We’re dedicated to guiding Texas families through the process of setting up a special needs trust tailored to their unique needs. Contact us today to schedule a consultation and learn how a special needs trust can provide peace of mind and security for your loved one’s future.