How a Special Needs Trust Works

A Twitter listener wants to know what a special needs trust is and how it works. Dave explains.

QUESTION: A Twitter listener wants to know what a special needs trust is and how it works. Dave explains.

ANSWER: Let’s say that your child was not special needs. Let’s say you had an 11-year-old and you were to pass away—both parents passed away. How would you ensure that your child was taken care of? It’d be one of two things—wealth you had built, money in investments, those kinds of things that would be set aside in a trust to take care of a minor child. You might have your brother or mother or whoever manage the trust and someone be the legal guardian of the child. If you don’t have enough investments to make sure that they’re taken care of, then you would buy good term life insurance, which we recommend about 10 times your income on you to make sure that your family is taken care of.

When our children were little, we had a will that upon both of our deaths all life insurance proceeds and assets of the Ramseys would go into a trust to be managed by a family member for the good of our minor children. The only difference with a special needs trust is that you carve out that particular child, and you might take a certain life insurance policy or a portion of the proceeds of one life insurance policy to fund the needs of that particular child. And when that child becomes 18 or 21 or whatever, they might not get control of the money. For instance, I’ve got a good friend who’s got a child with Down syndrome who will never care for himself. Were my friend to pass away, his money is left into a special needs trust that is good for the entire life of that child—not just until he’s old enough to manage on his own.

The big difference in a special needs trust is it’s very specific to that child who has special needs. The trust doesn’t dissolve ever. The money’s left there to take care of them throughout. You would just buy a life insurance policy with the beneficiary being that specific trust upon both of your deaths. If either parent is still alive, then you’re the best person to take care of that child, of course.

Really, there’s not a lot of difference in taking care of your children or in taking care of a special needs child except that little nuance of 1) we’re going to be very specific and 2) the trust really doesn’t dissolve unless the child is able to make their own decisions later on for whatever reason. It depends on the type of disability, I suppose.