Caring for children is a full-time job, especially when that child has special needs. To provide for the child, one of the most helpful trusts we recommend for our clients is the Third-Party Special Needs Trust.

Federal law specifically authorizes this trust, which can provide for your child without penalty. This means that creditors have no right to the trust’s funds because the third-party special needs trust owns the assets instead of the child owning them.

Getting started

You, not your child, must establish and fund a third-party special needs trust and name a trustee. The trustee can invest the funds any way he/she sees fit because the federal statute makes no limitations.

This type of trust is irrevocable, and once you set it up it’s out of your hands. It is set up specifically to hold assets for a beneficiary so that the funds do not disqualify the recipient from needs-based government benefits. This is especially beneficial if your child has a debilitating illness – such as schizophrenia – or needs round-the-clock hospital care.

To keep the child’s Medicaid (MediCal in California) benefits, a typical irrevocable trust would disqualify the child. However, a third-party special needs trust allows the child to keep using government assistance. You might fund the trust with cash, stocks, bonds – anything that has monetary value. The trustee will invest the funds to provide care for your child’s needs, such as nutritious food, secure and stable living arrangements and travel to family events.

Other thoughts

At the beneficiary’s death, the trust funds pass to whomever you name. The beneficiary has no say in giving the remainder to someone as part of their will.

Assume the trust still holds $200,000 when your child dies. You drafted the trust, so the remainder is split among your other children. Even though the deceased child may have been in debt, the $200,000 passes to the other children without creditors coming after it.

One major drawback of a third-party special needs trust is its inability to hold funds belonging to the person with special needs. If your child receives an inheritance that wasn’t specifically placed into the trust, or if he/she settles a personal injury case, the funds should not be placed in the trust. One dollar of a beneficiary’s own money could cause problems with the entire third-party special needs trust.

It’s important that parents let friends and relatives know about the Special Needs Trust they formed for their child, and that any contributions they wish to make should go into that trust. That way, the child’s access to public benefits won’t be jeopardized.

We hope this information is useful to you and helps you and your families. If you have a specific case or question, please don’t hesitate to call our office.

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