How to Set Up a Trust for a Special Needs Child in Texas
When planning for a special needs child’s future, parents and guardians often face the challenge of managing financial resources while making sure their child continues to receive benefits from government programs. One of the most effective tools for accomplishing this goal is setting up a trust.
A trust can provide ongoing support for a child with special needs without disqualifying them from vital government assistance programs. In Texas, as in other states, a trust must be carefully set up to comply with both state and federal laws. This is where I can help.
My primary goal is to see that your wishes for your child are heard. Below is a step-by-step guide to help parents and guardians understand how to establish a trust for a special needs child in Corpus Christi, South Texas, and The Coastal Bend area.
What Is a Special Needs Trust?
A special needs trust is a legal arrangement where a person (the grantor) sets aside assets for the benefit of a person with a disability or special needs (the beneficiary). The assets in the trust are managed by a trustee, who oversees the distribution of funds for the beneficiary’s needs.
The key point is that the funds in the trust don’t count as income or assets when determining eligibility for government assistance programs such as Medicaid or Supplemental Security Income (SSI).
In Texas, as with other states, if a special needs child receives an inheritance or gift directly, it could disqualify them from these critical programs. A special needs trust is designed to avoid that situation, as the assets are owned by the trust, not the child directly. However, it’s essential to set up the trust in the right way to protect those government benefits.
Types of Trusts for Special Needs Children
When setting up a trust, there are different options depending on the needs of the child and the assets available. The two primary types of special needs trusts are:
First-Party Special Needs Trust: This type of trust is funded with the child’s own assets, such as an inheritance or settlement. The key feature of a first-party trust is that any remaining funds in the trust, after the beneficiary’s death, must be used to repay Medicaid for services provided to the beneficiary during their lifetime. This is often required by the government to avoid overpayment for services.
Third-Party Special Needs Trust: A third-party trust is funded by someone other than the special needs child—typically parents, grandparents, or other family members. This trust allows the assets to be used for the child’s benefit without risking disqualification from government benefits. After the beneficiary’s death, the remaining assets in a third-party trust can be distributed to other family members or used for charitable purposes without the requirement to repay Medicaid.
The Position of the Trustee
A key component of a special needs trust is the trustee, who’s responsible for managing and distributing the funds. In Texas, as in other states, a trustee can be an individual (such as a family member or friend) or a corporate trustee (such as a bank or trust company).
It’s critical that the trustee understands the requirements for maintaining government benefits and the rules governing the trust. The trustee has the responsibility of managing the trust’s assets in the best interest of the special needs child.
This includes making distributions for the beneficiary’s needs, such as medical expenses, education, and recreational activities, without directly impacting eligibility for Medicaid or SSI. A trustee should also keep detailed records of all transactions and see that the trust complies with the relevant laws. Choosing someone you trust can’t be overstated.
The Importance of Choosing the Right Trustee
The choice of trustee is a significant one because the role involves ongoing financial and legal management of the trust. While some families choose to appoint a relative or friend, others may prefer to appoint a professional trustee, especially if the family lacks the time or expertise to handle the responsibilities.
Professional trustees can also provide impartiality and long-term stability, which may be important when managing funds for a child who may need support for many years. If a family chooses an individual trustee, it’s wise to make sure that they’re familiar with the responsibilities of managing a special needs trust and the intricacies of government benefits programs.
This is a key factor in keeping the child’s eligibility for Medicaid and SSI intact. Once you’ve chosen a trustee you can depend on without question, you can then jump into creating the trust itself.
Setting Up the Trust
Creating a special needs trust in Texas requires several steps, including legal documentation, funding the trust, and selecting the right trustee. Each step must be approached with careful consideration to make sure the trust functions as intended.
1. Drafting the Trust Agreement
The first step in setting up a special needs trust is to have an attorney draft the trust agreement. This is the legal document that outlines how the trust will be managed, who the beneficiaries are, and what the terms of the trust will be. The trust agreement will specify the trustee’s duties and powers, and it will also include provisions for managing the trust’s assets.
In Texas, it’s critical to work with an attorney who understands both Texas state law and federal regulations regarding special needs trusts. This is especially true in probate situations, where improperly drafted documents can result in the loss of government benefits.
2. Funding the Trust
Once the trust agreement is in place, the next step is to fund the trust. This can be done by transferring assets, such as cash, property, or investments, into the trust. The assets must be titled in the name of the trust, not the individual beneficiary.
The funding of a special needs trust can come from various sources, such as a parent’s or grandparent’s assets, life insurance policies, or gifts. However, if the assets come from the special needs child directly (such as from a personal injury settlement or inheritance), the trust must be set up as a first-party special needs trust.
3. Managing the Trust and Distributions
Once the trust is funded, the trustee will begin managing the trust assets and making distributions for the special needs child’s benefit. The trustee must make sure that the distributions don’t exceed the income and asset limits set by government programs like Medicaid and SSI. The trust can cover a wide variety of expenses, including but not limited to:
Medical treatments and therapies not covered by insurance
Specialized educational services
Personal care attendants or respite care
Recreational activities or vacations
Home modifications or assistive devices
The key to making these distributions without jeopardizing government benefits is that the money should be used to enhance the child’s quality of life, rather than to provide basic support like food and shelter, which are already covered by government programs.
4. Monitoring the Trust
Because the regulations surrounding special needs trusts can change over time, it’s important for the trustee to regularly monitor the trust to check compliance with the law. This may include reviewing government rules regarding Medicaid and SSI and adjusting distributions as necessary.
Additionally, the trustee must be prepared for changes in the child’s circumstances. For example, if the special needs child’s health improves or worsens, the trust might need to be adjusted to accommodate new needs. It’s also important to regularly update the trust if there are any changes in the family’s financial situation or the laws affecting Medicaid or SSI.
5. Probate and Trust Termination
Like all trusts, special needs trusts can be subject to probate if they’re not properly managed. In Texas, probate is the legal process of validating a will, distributing assets, and settling any debts. If a trust isn’t structured correctly, assets might have to go through probate, potentially resulting in delays or complications.
A properly established special needs trust avoids probate during the beneficiary’s lifetime. However, when the beneficiary dies, the trust may be subject to probate if there are remaining assets.
If the trust was set up as a first-party special needs trust, Medicaid will typically require repayment of services before any remaining assets can be distributed to other beneficiaries. With a third-party trust, there’s no repayment obligation, and assets can be passed on according to the terms of the trust.
Understanding these distinctions is crucial for securing the financial security and well-being of your loved one. Managing these intricacies is much easier with a compassionate attorney you can trust.
Work With a Compassionate Attorney
Setting up a trust for a special needs child in Texas is an important step in providing financial security and ongoing support. It allows parents and guardians to manage resources while keeping the child eligible for government programs like Medicaid and SSI.
To make sure that the trust meets all legal requirements, it’s crucial to work with an attorney who understands the specifics of trust law, Medicaid, and probate. With the right planning and structure, a special needs trust can provide peace of mind and financial stability for the future.
My firm provides services to Corpus Christi, South Texas, and The Coastal Bend area. This includes Kleberg County, Nueces County, Live Oak County, Jim Wells County, Aransas County, and Victoria County. When you need to set up a trust for your child, contact me, Russell Manning Attorney at Law