Planning for the future of a loved one with a disability requires thoughtful coordination of legal, financial, and public benefit considerations. One of the most important tools available to families is a special needs trust.
In this article, we use the term “special needs trust” broadly to describe a trust established for the benefit of an individual with a disability to protect assets while preserving eligibility for public benefits.
What Is a Trust?
A trust is a legal arrangement in which one person (the Settlor or Grantor) transfers assets to another person or entity (the Trustee) to manage those assets for the benefit of a third person (the Beneficiary).
There are many different types of trusts, each designed to achieve specific planning goals depending on a family’s unique circumstances.
Revocable vs. Irrevocable Trusts: What’s the Difference?
As a general overview, trusts fall into two main categories: revocable and irrevocable.
A revocable trust is commonly used in foundational estate planning. It allows the Settlor to retain control over the trust assets during their lifetime and can be amended or revoked at any time. Upon the Settlor’s death, the trust becomes irrevocable and the assets are managed or distributed according to its terms.
An irrevocable trust, by contrast, generally cannot be modified or terminated once it is established and funded. These trusts are frequently used for tax planning, asset protection, and public benefits planning.
Special needs trusts are a type of irrevocable trust specifically designed to benefit individuals with disabilities while protecting eligibility for means-tested government benefits.
What Is a Special Needs Trust?
A special needs trust is an irrevocable trust established for the benefit of an individual with a disability. It provides professional management of assets while helping preserve eligibility for public benefits such as Medicaid and Supplemental Security Income (SSI).
Special needs trusts may be funded with:
- First-party assets (assets belonging to the individual with a disability), or
- Third-party assets (assets that never belonged to the individual)
When properly drafted and carefully administered, these trusts are designed to ensure that trust assets are not counted as available resources for purposes of benefit eligibility.
What Is a Self-Settled (First-Party) Special Needs Trust?
A self-settled special needs trust—also known as a first-party special needs trust—is funded with assets that belong to the individual with a disability.
These assets may come from:
- Personal injury settlements
- Inheritances that were not properly planned
- Retroactive Social Security or other lump-sum payments
Federal law allows these trusts to be established by a parent, grandparent, legal guardian, or a court. The trust must be created and funded before the beneficiary reaches age 65.
The Trustee must be someone other than the beneficiary and is responsible for managing distributions in a way that preserves benefit eligibility.
Medicaid Payback Requirement:
Upon the beneficiary’s death, any remaining assets in the trust must first be used to reimburse the state(s) for Medicaid benefits provided during the individual’s lifetime.
What Is a Wholly Discretionary (Third-Party) Special Needs Trust?
A wholly discretionary trust—commonly referred to as a third-party special needs trust—is funded with assets that never belonged to the individual with a disability.
These trusts are typically created by parents, grandparents, or other family members as part of their estate planning. In many cases, they are funded upon the death of the person who created the trust, though they can also be funded during life.
The Trustee has complete discretion over distributions, which is critical to preserving eligibility for needs-based benefits.
Key advantages include:
- No age restrictions for the beneficiary
- No Medicaid payback requirement at the beneficiary’s death
- Flexibility to direct remaining assets to other family members or charities
What Can a Special Needs Trust Pay For?
A properly administered special needs trust can significantly enhance a beneficiary’s quality of life by paying for goods and services not covered by public benefits.
Examples include:
- Medical and dental care not covered by Medicaid
- Therapies and rehabilitation services
- Education, training, and support services
- Transportation and travel
- Assistive technology and communication devices
- Personal care attendants and recreational activities
Because certain distributions—particularly those for food and shelter—can affect SSI benefits, Trustees must exercise caution and, ideally, work with experienced advisors.
Planning for the Future
Planning for a loved one with a disability is highly individualized. The right approach depends on the beneficiary’s needs, the type of assets involved, and the family’s long-term goals.
Careful planning with an experienced special needs attorney can help ensure that financial resources are protected while maintaining access to critical public benefits. If you would like guidance tailored to your family’s situation, our team is here to help you take the next step.
Frequently Asked Questions About Special Needs Trusts
Do I need a special needs trust if my child already receives SSI or Medicaid?
Yes. If your child receives or may receive means-tested benefits like Supplemental Security Income (SSI) or Medicaid, a special needs trust can help protect those benefits while allowing family members to set aside funds for their future needs.
Can a special needs trust pay for housing or food?
It can, but caution is required. Payments for food or shelter may reduce SSI benefits. A Trustee should carefully evaluate distributions and, when appropriate, consult with a professional to avoid unintended consequences.
Who should serve as Trustee of a special needs trust?
The Trustee should be someone who is financially responsible and understands the rules governing public benefits. Many families choose a trusted individual, a professional fiduciary, or a corporate trustee—or a combination of these.
What happens if a special needs trust is not set up correctly?
If a trust is improperly drafted or administered, the assets may be counted as available resources, which can result in the loss of important benefits like SSI or Medicaid. Proper legal guidance is essential.
Can grandparents or other relatives contribute to a special needs trust?
Yes. Family members and others can contribute to a third-party special needs trust, making it a useful tool for coordinated family planning.
Is there a difference between a special needs trust and an ABLE account?
Yes. An ABLE account is a tax-advantaged savings account with contribution limits and eligibility restrictions, while a special needs trust can hold larger amounts and offers more flexibility in planning and distributions. In many cases, both tools can be used together as part of a comprehensive plan.