An irrevocable special-needs trust is the best way to provide for a disabled or mentally retarded adult or child who needs to retain government benefits. Done properly, such a trust can ensure that the beneficiary will have the things that enrich his or her life now and after you are gone and still qualify for essential government benefits such as Social Security and health care.

Avoid Legal Snares

It's critical to have the proper language in a special-needs trust: The wording in a typical support trust can jeopardize the beneficiary's access to government benefits.

The first step in creating a solid special-needs trust is to hire a lawyer who has experience with them. Your trust documents must explicitly state that the trust and its funds will only supplement the benefits and services provided by the government. In some cases, the lawyer may recommend that you specifically exclude services such as room, board and life essentials.

But maintaining government benefits is usually not your only goal. You should also make sure the trustee can help the beneficiary meet his or her own goals and maintain family relationships.

Hypothetical:  Sally Smith, a lawyer based in New Orleans who specializes in such estate planning, has a son, Bob, who suffers from high functioning autism. Bob, who is now 29, wants to work and has a part-time job at a department store. Because he's earning money, he retains fewer government benefits, something that Smith sees as a fair trade-off.

You can put almost anything in a special-needs trust: cash, mutual funds, life insurance and real estate.

Inform the Family

Well-meaning relatives and friends can easily sabotage a perfectly good special-needs trust.  So, once such a trust is created, you must educate yourself and your family on how to properly fund it.  All too often, parents set up a special-needs trust but then neglect to modify their wills so that assets pass to the trust rather than to their child.

Those who are relatives of the disabled person die, need to know how important it is to properly distribute their wealth as they consider the disabled individual.  Proper planning requires that gifts to the person with a special needs trust specifically note in their will or trust that the portion goes to the special needs trust, not directly to the person with the special needs trust.  If the money goes directly, the result is usually ineligibility for government benefits.

Those on Medicaid or who are receiving supplemental security income from Social Security can't own much or earn much. Someone who owns more than $2,000, say from gifts or an inheritance, will not qualify. There are also strict income limitations.

Also, bear in mind that not all assets pass by will. Make sure you name the trust as the beneficiary of life insurance proceeds that you want to benefit the disabled individual. If you have an IRA or other retirement plans you want to leave to the trust, get expert advice to determine that your bequest will work as you intend

If you're a grandparent with significant assets and a grandchild with special needs, consider setting up your own trust. That way you control who inherits any remaining assets after the grandchild dies.

Pick the Right Trustee

Since the trustee has absolute power over the assets in the trust, pick someone you trust absolutely who will have the beneficiary's best interests at heart. The trust can provide for transportation, training, entertainment, trips and vacations or a home-health aide.

If the disabled person will have a new legal guardian once you and your spouse are gone or can no longer fulfill that role, it's wise to arrange for the trustee and the guardian to be two different people to avoid vesting too much power in one person.

You must also consider whether the trustee who is best for the disabled person is the individual you want to charge with investing the assets, filing paperwork, and paying the taxes. It may be wiser to use a mutual fund, accountant and tax lawyer for those tasks.

If enough assets are involved, you may want to consider hiring a professional trust manager, such as Merrill Lynch (call a local office for details), MetLife (877-638-3375) or Morgan Stanley Dean Witter (call the local branch).

Another option, especially if you will fund the trust with a modest sum of money, is a "pooled trust." In this type of special-needs trust, a nonprofit group combines the assets of its clients, invests them, and gives back the interest on a pro-rata basis to the trustee, who can spend it on the trust's beneficiaries.

To find a pooled trust, call the advocacy organization in your state that caters to your child or ward's specific disability. Check the organization's track record and fee structure, and find out where the money goes when your child or ward dies.

Don't Use Disinheritance in Place of Planning

Parents sometimes think it's best to disinherit the disabled person and direct the assets to a sibling or other family member who would care for him or her. Resist the temptation: It could be disastrous for the individual with the disability.

A sibling isn't legally bound to use inherited assets for the care and support of a disabled brother or sister, absent some specific, enforceable obligation. It's also possible that the child you are depending on to provide the care may become overwhelmed by the responsibility or too ill to handle it.

Even if the person you pick is dedicated, caring and trustworthy, the assets you earmarked for the disabled individual could still be lost. For instance, if the caretaker dies, divorces or encounters financial problems, the money could wind up in other hands.

A Way to Undo Errors

If assets are mistakenly given directly to the disabled person, you can salvage the situation, but at a price. Through an OBRA Trust (created by the 1993 Omnibus Budget Reconciliation Act), the misdirected assets can be taken back and placed in a separate OBRA special-needs trust. (Never commingle the assets in an OBRA trust with assets in an existing trust.)

The OBRA trustee has access to those funds to pay for activities and services for the beneficiary. But when the beneficiary dies, the assets in the trust go to the government to reimburse it for expenses it paid on behalf of the beneficiary. (After that, any remaining assets may pass to the person or organization you named as the remainder beneficiary.)