Creating Trusts for Children With Special Needs
Planning for a child with special needs requires thoughtful, long-term strategies that go beyond daily care. Parents often worry about how to provide consistent support, protect eligibility for public benefits, and create lasting financial security.
At the Law Offices of Malcolm B. Seawell, my focus is on helping you protect what matters most—your children. One of the most effective ways we can do this is by creating a trust specifically designed for a child with special needs.
Located in Denver, Colorado, my firm serves families throughout the Denver Metro area, including Aurora, Golden, Lakewood, Arvada, Boulder, Brighton, Englewood, Castle Rock, Littleton, and Highlands Ranch.
With careful planning, families can provide for their loved ones without jeopardizing access to public benefits. Whether you’re managing personal injury proceeds or setting aside an inheritance, building the right kind of trust can make a lifelong difference.
Why a Traditional Trust May Not Be Enough
Traditional revocable or irrevocable trusts often fail to account for the eligibility rules associated with Medicaid or Supplemental Security Income (SSI). These government programs have strict asset and income limits. If a child with disabilities receives too much in their name, they may lose access to benefits they depend on.
This is where special needs trusts—also called supplemental needs trusts—come into play. These legal tools allow families to set aside money for a child’s future while preserving public benefits.
How Special Needs Trusts Work
When you set up a special needs trust correctly, it works like a financial safety net that doesn't interfere with your child's government benefits. The trust holds money for your child's future, but it stays invisible to benefit programs that count assets.
Here's the key difference: instead of giving your child cash directly, the trust pays for things that make life better—specialized equipment, therapy sessions, educational programs, or even fun experiences that bring joy and independence.
The trust can cover:
Medical expenses not covered by Medicaid: Including dental care, therapies, or adaptive equipment.
Educational costs: Like private school tuition, tutors, or specialized learning programs.
Housing supplements: Rent, utilities, and home modifications.
Recreation and enrichment: Vacations, hobbies, internet service, and more.
Each expenditure must benefit the child without violating rules that could reduce or terminate government assistance.
First-Party vs. Third-Party Special Needs Trusts
Planning for the future of a child with special needs starts with understanding how to provide lasting protection without jeopardizing critical support systems.
First-Party Special Needs Trusts
There are two main types of special needs trusts, and the difference lies in where the funding comes from.
A first-party trust is funded with the beneficiary’s assets. These often include:
Personal injury settlements: If a child receives compensation from a lawsuit, those funds can be protected in a first-party trust.
Inheritance left directly to the child: Without proper planning, well-meaning relatives may unintentionally cause eligibility issues.
Backpay from Social Security or insurance: Large lump-sum payments can create financial problems if not handled correctly.
These trusts must follow federal guidelines and include a Medicaid payback provision, which means that any funds remaining when the child passes must reimburse the state for the care received.
Third-Party Special Needs Trusts
These are created and funded by someone other than the beneficiary. Parents, grandparents, or other relatives typically set them up as part of their estate plan.
Key benefits include:
No Medicaid payback requirement: Funds can go to other heirs after the child’s lifetime.
Greater control over distributions: The trust can define how and when money is used.
Integration with other plans: These trusts work well alongside life insurance, retirement accounts, or wills.
I often help families decide which type—or combination—fits their situation best.
Appointing the Right Trustee
Choosing a trustee for a special needs trust is a critical decision. This person or institution will manage the funds, make disbursements, and keep the trust in compliance with changing laws.
Consider:
Family members who understand the child’s needs: A sibling or relative can offer personal insight but may lack financial or legal knowledge.
Professional trustees: Banks or law firms can provide experience and stability, though they charge fees.
Co-trustees: Some families appoint a relative and a professional to work together for balance and accountability.
The trustee should be familiar with both financial management and government benefit requirements. I always take time to help clients weigh their options carefully.
Funding the Trust Properly
A trust is only as strong as its funding. That means retitling assets into the name of the trust or naming it as a beneficiary of certain policies.
Common options include:
Life insurance policies: A common and cost-effective way to provide future support.
Personal injury awards: I often help families deposit settlements into a first-party trust to avoid benefit disruptions.
Real estate and investment accounts: These may need to be sold, transferred, or earmarked with care.
It’s also essential to let family members and friends know how to direct their gifts. Giving money directly to a child with disabilities—even with good intentions—can cause lasting problems. I work with clients to communicate these instructions clearly to loved ones.
Working With Personal Injury Funds
Special needs trusts are especially important when personal injury funds are involved. A settlement might seem like a financial windfall, but if placed directly in a child’s name, it could disqualify them from Medicaid or SSI.
What I can do instead is set up a first-party trust that safeguards those funds and makes sure every dollar serves your child's best interests.
Now, this type of trust usually needs a judge's approval—especially when we're talking about a minor. That's where I step in. I guide families through every step of the court process, helping the judge see the full picture of what your child will need, both today and in the years to come.
Personal injury cases also involve other considerations:
Structured settlements vs. lump sums: Spreading out payments over time can affect how and when the trust is funded.
Lien resolution: Medicaid, hospitals, or insurers may seek repayment from the settlement, which needs to be addressed before funding the trust.
Court oversight: Some jurisdictions require annual reporting or review for first-party trusts, particularly if they are court-created.
These steps can be technical, but they’re essential to protect a child’s financial future while respecting benefit rules.
Coordinating With Public Benefits
One of the most valuable aspects of a special needs trust is its ability to supplement—not replace—public benefits. When set up correctly, the trust can provide extras that make life fuller and more comfortable.
The trustee must:
Avoid direct payments to the beneficiary: These can be counted as income and reduce SSI.
Pay third parties directly: For example, paying the landlord instead of giving the child money for rent.
Keep detailed records: Distributions should be tracked and justified to prevent eligibility issues.
I often counsel trustees and families on how to maintain compliance. It’s one thing to establish the trust, but maintaining it and keeping it active and functioning properly requires ongoing attention.
Planning for the Long-Term
Trusts aren’t just legal tools. They’re long-term commitments to your child’s well-being. That’s why I help families build flexible, forward-looking plans.
Things to consider:
What happens when you’re gone: Successor trustees, care plans, and letters of intent can guide future decisions.
How needs may change over time: Education, medical conditions, and public programs evolve—your trust should be able to adapt.
Who else needs to know: Siblings, extended family members, and care providers should be informed about the plan and their respective roles.
Many of my clients have shared that knowing their child’s future is accounted for gives them real peace of mind. That’s something no document alone can provide—it comes from thoughtful planning and honest conversations.
Create Long-Term Security for Your Loved One
Your child's future depends on the choices you make today. I specialize in creating trusts that give children with special needs the support they deserve without jeopardizing their personal injury settlements or essential government benefits. Together, we'll build a comprehensive plan that secures your child's well-being for decades to come. At the Law Offices of Malcolm B. Seawell, I partner with families across Denver, Colorado, and the greater Denver Metro area—from Aurora and Golden to Boulder, Castle Rock, and everywhere in between. Call now to get started.