The most commonly used special needs trust is a family-type trust, which is set up by the parents. The parents provide the money for the trust, often by will, and sometimes by purchasing life insurance payable to the trust.

In most cases, the parents write a will giving money or a house to the disabled son or daughter ("Beneficiary.") After the beneficiary has died, anything left over goes to other family members. The left-over is called the "remainder."

Some parents place their property in a "living" or "inter vivos" trust, and provide in the trust that the disabled son or daughter is the beneficiary. With that type of trust, there is no need to wait for the parents to die. The trust becomes effective immediately. This is a good idea for families where aunts, uncles, and grandparents might want to leave money for the trust. Anyone can give money to the trust, either by writing a check or writing a will.

The key to a family-type special needs trust is that the money CANNOT be used for housing, food, or clothing. Those are considered "basic needs" under SSI and Medicaid laws. If the disabled person is receiving free housing, food or clothing from someone else, including a family member or a trust, then the government benefits will be reduced or eliminated.

The trust can be used to purchase a home, and perhaps rent it to the disabled person. The trust can pay for repairs, utilities and taxes for a home; it can purchase furnishings for the home. It can pay for vacations, summer camp, or trips. It can buy bowling shoes or other sporting equipment. It can pay for medical costs not otherwise covered by Medicaid, such as vitamins. It can pay for funeral and burial costs.  It can pay for a lot of things, but it doesn’t have to pay for anything unless the trustee thinks it is a good idea.

The parents generally serve as trustee as long as they are alive. When they die, a successor trustee has to be ready to take over. Some parents choose a bank to serve as trustee, but banks are expensive and do not keep track of the disabled person’s individual needs. A responsible family member is usually a better choice, if one can be found.

There are legal emergencies which a trust can pay for. If the person is not receiving the services he or she needs from Social Security, Medicaid, or other government agencies, the trust can pay for an attorney or other advocate to fight for the individual. Without this type of help, the person might actually become homeless.

If the disabled person gets into trouble with the police, he is vulnerable to being falsely convicted of a crime, and so the trust ought to hire an attorney. The prisons are disproportionately populated with mentally impaired individuals, including those who are intellectually impaired and DD.

The parents can provide the money for this type of trust, and so can other family members, such as grandparents, aunts, and uncles. The only person who cannot place money into this type of trust is the disabled person.

In my opinion, a minimum of $25,000 should be considered for a special needs trust, and more if possible. Some attorneys recommend half a million as a starting point. However, if the family cannot put more than a few thousand dollars into a trust, that is still a valuable resource for the disabled person.  Even smaller trust funds can be of great help, as long as the money lasts.

ATTORNEY TIP:  If you are an attorney helping someone with an estate plan, and there is a child in the family who may need "special education," there is no harm setting up a special needs trust to protect that child.  Suppose the child is not currently receiving any government benefits, but he or she might qualify for benefits in the future.  Why take a chance?  Establish a special needs trust.  Let the trustee distribute the money free of trust if the child reaches adulthood with no apparent need for disability benefits.

The nonprofit agency that administers the trust takes care of all the tax preparation, investment decisions, and also serves as trustee. For example, the Spring Hill trust in Birmingham, Michigan, is open to new "sub-accounts" for disabled persons who live anywhere in the state. The cash is kept in a bank, but the non-profit owns all the deeds to houses and other real estate, as trustee. (Banks do not want to own real estate in trust because they are afraid of environmental problems.)

Any money left in the trust after the beneficiary dies, stays in the trust to help other persons with disabilities. The money does not go to the State.

A pooled trust can purchase a home for the beneficiary, and rent it to him or her. Before the pooled trust is set up, the parents and other family members explain what they want the trust to pay for, and who should be consulted about these matters.

EXAMPLE: "Sarah" opens a sub-account at a pooled trust. She has some money saved from her part-time job, and her parents also write a check for it. As she works, she adds more money to it. She can continue to receive Medicaid no matter how much money she saves, because it is in the trust. Her parents can leave money to the trust in their will.

Sarah would like to live in a house with a friend. The friend might have a disability, and might not. Whatever seems best for Sarah. The trust can purchase a home and rent it to both of them. The rent checks from Sarah and her friend are paid into the trust and kept for Sarah’s benefit. The trust can also use the money to pay for Sarah’s summer camp, or furniture for her house. The nonprofit association consults her parents about this while they are alive, and after they pass away, Sarah’s sister is consulted.

COURT ORDERED TRUST

A court-ordered trust, also called a Type "A" special needs trust, is used only for special circumstances, such as where the person with a disability has inherited money, or received a court settlement.

Because the disabled person actually owns the money, the funds cannot be put into the usual special needs trust such as parents usually set up.

To qualify, the disabled person has to be under 65 years old and meet the medical standards of Social Security, in terms of the disability. Someone who is not disabled enough to qualify for Social Security cannot have this type of trust.

The trust has to specify that after the disabled person has died, anything left over will pay back the State of Michigan for whatever medical assistance the government provided to the individual after the trust was set up. As a practical matter, that means that any unspent money will go to the government. It is unlikely that after Medicaid is paid back, anything will be left over.

EXAMPLE: A person with a disability receives SSI. Then, he or she receives a $6,000 check from the Social Security Administration for back benefits after a parent died, because the parent was employed. The disabled person qualifies as a "disabled adult child" of the working parent. The money has to be spent quickly, otherwise the person will lose his or her Medicaid. A type "A" trust can be established so that the person will have the money available for the rest of his or her life, and still receive Medicaid. Another alternative: a type "C" trust (pooled trust) would work just as well to accomplish the same goal.