Special trust for your child

Let’s talk about a special trust for your child. Not necessarily a “special needs” trust, but a trust for a beneficiary who can not manage their own finances.

What’s in a name?

Search for information about special needs trusts, and you’ll find plenty of entries. But you’ll also find plenty of confusion. What’s the difference between a “first-party” or “self-settled” special needs trust, and the “third-party” version? And what if your goal is to erase any stigma or separate treatment — do you want something called a “special needs” trust at all?

Let’s take a step back from all the phrases and definitions. Do you have property? Do you want it to go to your child (or children) after your death? Is there any value to leaving their inheritances in trust, rather than outright?

If you have a child receiving public benefits like Supplemental Security Income (SSI), or AHCCCS (Medicaid) benefits, you should be looking into putting their inheritance into a trust. That trust probably should be a “special needs” trust.

But if your child isn’t receiving public benefits, they might not need a “special needs” trust. After your death, they might even move from SSI and AHCCCS to receiving benefits on your Social Security account and, perhaps, Medicare instead of AHCCCS/Medicaid. But they still might need someone to manage the money and make decisions about expenditures.

The same might be true even if your child is not now receiving public benefits, and is unlikely to ever start receiving them. In such a case, their mild disability — or simply their inability to make responsible financial decisions — might argue for a trust with some special provisions.

What kind of special trust is appropriate for your child?

Almost everything you read about a “special needs trust” will tell you what you can’t spend the money on. No food. No housing expenses. And never give the beneficiary cash.

Those rules are not applicable to all special needs trusts. A good trustee can weigh the effect of distributions for “prohibited” items. They can also determine what effect distributions will have on benefits. A good trust will allow the trustee to make that decision.

The special trust for your child with limitations should probably have three characteristics:

  1. Language giving the trustee discretion to make distributions for broad ranges of benefits — without strong language limiting the distributions and no provision for “support and maintenance” of the child. That last element can help prevent the trust from being counted as “available” to your child for future public benefits eligibility.
  2. A “spendthrift” provision, making it impossible for your child’s creditors to make claims against the trust.
  3. A carefully chosen and expert trustee, who knows the rules, can weigh the competing considerations and make decisions in your child’s best interests.

Note that nothing requires the trust to be called a “Special Needs Trust” — either in the name or in the text. That’s true even when the trust actually is a special needs trust.

Note: we’re only talking about your money here

Let’s be clear: we are not writing about a special trust established by your child. Nor are we discussing a trust established by you, but funded with your child’s money. These generalities only apply to trusts holding money that came from you — or from other family members or donors.

We have written before about that kind of trust. It is usually called a “self-settled” special needs trust, or (sometimes) a “supplemental benefits” trust. Arizona’s AHCCCS program adds to the confusion by calling those trusts “special treatment” trusts. The names are so convoluted as to be almost meaningless to the uninitiated. But the key element of that kind of trust is that the rules are much more restrictive. That’s why you read so much about restrictions when you look up “special needs” trusts.

The trust you establish for your child should be as special as your child is. It should be tailored to their situation, and to the likely changes in their future. The conversation about your hopes, wishes, and concerns about your child’s future is one we look forward to. In fact, it’s our favorite part of meeting new estate planning clients.

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