As a parent of a special needs adult child, you recognize that your child will likely need lifelong care. You also understand it is possible that your child will outlive you and you need to make plans for their care after you are gone and can no longer care for them on your own.
Many special needs children and adults rely on government benefits for medical care, residential care and other needs. Simply leaving money for your disabled adult child in your will could backfire as it may make them ineligible for certain government benefits such as Supplemental Security Income and Medicaid. Some parents of disabled adult children choose to set up a special needs trust to circumvent this problem.
Defining a special need
In order to qualify for a special needs trust, your adult child must be under age 65 and they must have a severe disability that makes it impossible to work, meaning they rely on government benefits. If your disabled adult child works, they could earn too much to qualify for a special needs trust.
Each state, including New York, has different rules on who can be the beneficiary of a special needs trust. Some states require a third-party medical evaluation.
Types of special needs trusts
Most special needs trusts are third-party trusts. This means they are set up in advance and are funded by a third party (such as you) on behalf of your adult child, the beneficiary. Remaining funds allocated in the trust after your adult child passes away can go to a family member or charity of your choice.
Some special needs trusts are first-party trusts. This means your adult child will receive funds directly, for example, as a cash settlement if they are disabled in a car crash. Keep in mind that first-party trusts generally include a payback clause in which remaining trust assets go to the state to reimburse what the state paid in government benefits.
If your adult child is the beneficiary of a special needs trust, they cannot receive direct distributions from the instrument. The trustee has the discretion in how distributions will be made for your child’s benefit. The administration of benefits must be drafted to match the rules that qualify your adult child for government benefits.
If you are not sure if your child will be able to work as an adult, you can still execute a trust naming them as beneficiary with a clause stating that if your child qualifies for government benefits as an adult, the trust will convert into a special needs trust. This way, your child will be cared for financially after you pass on.