Parents of children with disabilities often worry about how their child will manage when they are no longer able to provide care. This concern is especially pressing when the child relies on means-tested government benefits like Supplemental Security Income (SSI) or Medicaid. These programs have strict asset limits—usually just a few thousand dollars—so leaving money directly to a child can unintentionally disqualify them from benefits.

A recent Kiplinger article, “Estate Planning: A Special Trust for a Special Need,” highlights the solution: a Supplemental Needs Trust (SNT).

What Is a Supplemental Needs Trust?

An SNT is a legal tool designed to provide financial support for a person with disabilities without jeopardizing their eligibility for government benefits. Here’s how it works:

• The trust, not the individual, owns the assets, so the funds are excluded from asset limit tests.

• Funds in an SNT can be used to improve quality of life, such as:

  • A cell phone or computer

  • A private room in a group home

  • Vacations or hobbies

  • Educational expenses

• An SNT helps ensure that a vulnerable family member has the financial support they need, while relieving other relatives, like siblings, from the financial burden.

Who Can Have a Supplemental Needs Trust?

SNTs are designed for individuals with severe mental or physical disabilities who are unable to work and require long-term support from government programs. Important points to know:

• SNTs can only be created for those under age 65.
• A person who is able to work and does not qualify for government benefits is not eligible for an SNT. However, an estate planning attorney can help create a different type of trust for their needs.
• In some cases, a child with a disability like autism may grow into an adult who can work. Estate planners recommend setting up an SNT just in case. If the family member qualifies, the trust is ready. If not, the SNT functions like a standard trust and distributes income according to your instructions.

Managing a Supplemental Needs Trust

Setting up an SNT is not a one-and-done task. There are key responsibilities to consider:

• A trustee and successor trustee must be named to manage the trust and make distribution decisions.
• The trust must state that the trustee has sole discretion over distributions.
• Each state has its own rules for SNTs, including potential requirements for medical verification. An estate planning attorney will customize the trust to meet your state’s laws.
• If the beneficiary moves to another state, the trust may need to meet the legal requirements of both states.

Tax Considerations for a Supplemental Needs Trust

SNTs often operate as pass-through entities for tax purposes, which means:

• Any income earned by the trust is typically distributed to the beneficiary the same year, so it is taxed at the beneficiary’s tax rate.
• If income is not distributed, the trust is taxed at higher rates—up to 37% for high-income trusts.
• The trust must file an annual tax return to report income, even if it doesn’t owe taxes.
• If the trust is named as the beneficiary of a parent’s traditional IRA:
  • The IRA can continue to grow tax-deferred.
  • The trust must collect Required Minimum Distributions (RMDs) each year and pass them to the beneficiary as income.
  • Any undistributed amounts from RMDs may be taxed at the trust’s highest tax rate.

Protecting Your Child’s Future

A Supplemental Needs Trust is a powerful tool for families caring for a loved one with disabilities. It helps ensure your child has the resources they need, without putting their benefits at risk. Work with an experienced estate planning attorney to tailor the trust to your family’s situation and your state’s laws.