Most of my clients who sit down to discuss estate planning for their special needs child are surprised to hear that there are actually two types of special needs trusts, one of them being much more appealing than the other. Well, there are really three types, but the third type (D4C pooled trusts) rarely comes up. Anyway, the question of which one you need to use is based on the source of the trust funding.
If the trust is funded by assets that belong to the special needs child (usually by way of a personal injury settlement, or possibly an inheritance from a well-meaning relative) then it's called a "self-settled" or "D4A" trust. This is not an ideal situation because Federal law requires that the trust include a "pay-back" provision. Such a provision states that upon the death of the special needs child the remaining trust funds must go to the State, up to the amount that the State has contributed towards the care of your child. It essentially allows the State to get reimbursed and it's possible that you would not be able to have the money go to family members instead. It depends on how much the State has helped out your child.
If the money going into the trust comes from a source other than the special needs child (presumably the parents and possibly other relatives), then it's called a "third party" special needs trust. This type of trust does not require a pay-back provision for the State. Upon the death of your child, the remaining trust funds can go to family members, charities, churches or anywhere else you would like it to go.
So...if you have a special needs trust it's worth taking the time to have your lawyer review it and make sure that it doesn't have that nasty pay-back provision unless it has to. You'd be surprised by how many special needs trusts I review where the attorney unnecessarily/accidentally included a pay-back provision.
DISCLAIMER: This blog does not offer legal advice, nor does it create an attorney-client relationship. If you need legal advice, consult with a lawyer instead of a blog.