Top 5 Considerations for Special Needs Trusts for Children in Alabama

When creating a special needs trust (SNT) for a child in Alabama, careful planning is essential to protect their eligibility for government benefits and ensure long-term financial security. Here are the five most critical factors to address:

1. Select the Right Type of Trust
   • Third-Party SNT: Funded with assets from parents, grandparents, or others (not the child’s own resources). This avoids Medicaid “payback” requirements, allowing remaining funds to pass to other heirs after the child’s death.
   • First-Party SNT: Used if the child owns assets (e.g., inheritance or legal settlement). Requires Medicaid reimbursement upon the child’s death and must be established before age 65.
   • Pooled Trusts: Managed by nonprofits like Alabama Family Trust, which pools assets for cost efficiency and offers lower minimum contributions ($1,500).
2. Choose a Qualified Trustee
   The trustee manages distributions and must:
   • Understand the child’s unique needs (medical, recreational, educational).
   • Comply with Medicaid/SSI rules to avoid disqualifying benefits.
   • Balance family insight with professional expertise. Consider co-trustees (a family member + institutional trustee) for accountability.
3. Structure Distributions to Preserve Benefits
   • Funds must supplement, not replace, government benefits. Use trust assets for extras like therapies, education, or travel-not basic needs like food or shelter.
   • Avoid direct cash gifts to the child, as this can reduce SSI benefits.
4. Plan Funding Strategically
   • Use life insurance, inheritances, or gifts to fund the trust. Ensure contributions comply with annual gift tax exclusions ($18,000 per recipient in 2025).
   • Avoid transferring assets directly to the child. Even small inheritances or UTMA accounts can jeopardize benefits.
5. Ensure Legal Compliance with Alabama Laws
   • Adhere to Alabama Code § 19-3B-1101, which protects SNTs from state laws that might disqualify beneficiaries from needs-based benefits.
   • Work with an elder law or special needs attorney to draft the trust, ensuring it meets Medicaid/SSI requirements and addresses future contingencies (e.g., changes in the child’s condition).