A special needs trust — also called a supplemental needs trust — is a legal arrangement designed to hold assets for the benefit of a person with a disability without disqualifying them from government benefits such as Medicaid and Supplemental Security Income. It is one of the most important estate planning tools available for families who have a loved one with a disability.
Why special needs trusts exist
Many government benefit programs that support people with disabilities are needs-based meaning they are only available to people with limited income and assets. Medicaid which provides health coverage and long term care for people with disabilities and SSI which provides monthly income payments both have strict asset limits — typically $2,000 or less for an individual.
Without a special needs trust if a person with a disability receives a significant amount of money — through an inheritance, a personal injury settlement, or a gift — they may exceed these asset limits and lose their eligibility for critical government benefits. A special needs trust allows assets to be held for the person’s benefit without being counted toward those limits.
How a special needs trust works
Assets placed in a special needs trust are managed by a trustee who uses them to pay for goods and services that supplement — not replace — the beneficiary’s government benefits. The trust is designed to enhance the beneficiary’s quality of life by paying for things that government programs do not cover such as:
- Education and vocational training
- Recreation and entertainment
- Travel and vacations
- Technology and electronic devices
- Personal care items beyond basic necessities
- Transportation
- Home furnishings and personal belongings
- Dental and medical expenses not covered by Medicaid
The trustee must be careful not to use trust funds to pay for items that would otherwise be covered by government benefits such as food and shelter in most cases as this could affect the beneficiary’s benefit eligibility.
Types of special needs trusts
There are three main types of special needs trusts each serving a different purpose:
- First party special needs trust — also called a self-settled trust or d4A trust, this type of trust holds assets that belong to the person with a disability such as a personal injury settlement or an inheritance they have already received. Federal law allows people under age 65 with disabilities to place their own assets into this type of trust without losing Medicaid eligibility. However upon the beneficiary’s death Medicaid is entitled to reimbursement from the trust for the cost of benefits paid — this is called the Medicaid payback provision.
- Third party special needs trust — this type of trust is created and funded by a parent, grandparent, or other third party using their own assets — not assets belonging to the person with a disability. It is commonly used by parents who want to leave an inheritance for a child with a disability without disqualifying them from government benefits. Unlike a first party trust a third party special needs trust does not require Medicaid payback upon the beneficiary’s death — remaining assets can pass to other beneficiaries.
- Pooled trust — a pooled trust is managed by a nonprofit organization that pools the assets of many beneficiaries for investment purposes while maintaining individual accounts for each beneficiary. Pooled trusts are available to people of all ages including those over 65 who may not be eligible for other types of special needs trusts.
Who should be the trustee
Choosing the right trustee is one of the most important decisions in creating a special needs trust. The trustee is responsible for managing trust assets, making distribution decisions, filing tax returns for the trust, and ensuring that distributions do not jeopardize the beneficiary’s government benefits.
Options for trustee include:
- A trusted family member or friend who understands the beneficiary’s needs and the rules governing special needs trusts
- A professional trustee such as a bank, trust company, or attorney who has experience managing special needs trusts
- A combination of a family member as co-trustee with a professional trustee
Many families choose a professional trustee or co-trustee because of the complexity of managing a special needs trust and the significant consequences of making distribution errors that affect government benefit eligibility.
What happens to the trust when the beneficiary dies
What happens to assets remaining in a special needs trust when the beneficiary dies depends on the type of trust:
- First party trust — remaining assets must first be used to reimburse Medicaid for the cost of benefits paid to the beneficiary during their lifetime. Any assets remaining after Medicaid is repaid can pass to other beneficiaries named in the trust.
- Third party trust — remaining assets pass to other beneficiaries named in the trust with no Medicaid payback requirement.
- Pooled trust — the nonprofit organization that manages the trust retains a portion of remaining assets and the rest may be distributed to other beneficiaries or retained by the nonprofit depending on the trust agreement.
Planning for a child with special needs
For parents of a child with a disability estate planning requires special consideration. Simply leaving money directly to a child with a disability in a will can disqualify them from government benefits. Instead parents should:
- Create a third party special needs trust to hold assets intended for the child with a disability
- Name the special needs trust — not the child directly — as the beneficiary of life insurance policies and retirement accounts
- Update beneficiary designations on all financial accounts to ensure assets do not pass directly to the child with a disability
- Write a letter of intent — an informal document that describes the child’s needs, preferences, routines, and wishes to guide future caregivers and trustees
The role of an attorney
Special needs trusts are complex legal documents that must be drafted carefully to comply with federal and state law. An error in the trust document or in how distributions are made can result in the loss of government benefits. Working with an attorney who specializes in special needs planning is strongly recommended.
Key terms to know
- Special needs trust — a trust designed to hold assets for a person with a disability without disqualifying them from government benefits
- Supplemental needs trust — another term for a special needs trust
- First party trust — a trust funded with assets belonging to the person with a disability, subject to Medicaid payback
- Third party trust — a trust funded by a parent or other third party, not subject to Medicaid payback
- Pooled trust — a trust managed by a nonprofit that pools assets of multiple beneficiaries
- Medicaid payback provision — the requirement that a first party special needs trust reimburse Medicaid upon the beneficiary’s death
- Trustee — the person or organization responsible for managing the trust and making distributions
- Letter of intent — an informal document describing the needs and wishes of a person with a disability to guide future caregivers and trustees
Sources
- Social Security Administration — ssa.gov
- Medicaid.gov
- Special Needs Alliance — specialneedsalliance.org
- American Bar Association — Public Resources
- USA.gov
This article is for general informational purposes only and does not constitute legal or financial advice. Special needs trust rules vary by state and are subject to change. Consult a licensed attorney who specializes in special needs planning for guidance specific to your situation.