Special needs trusts: how do they work and who benefits?

This part of an estate plan can help parents with children with disabilities.


Elissa Suh

Published October 25, 2019

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  • A special needs trust is primarily used to help persons with disabilities retain eligibility for government benefits

  • Programs like SSI and Medicaid have income and asset eligibility requirements

  • Trust funds should typically only be used to improve quality of life and not for basic necessities, like food and shelter

Parents who have a child with special needs might take a different approach than others when planning for the future. Some people continue to live with disabilities well into adulthood and may not be able to work a full time job or qualify for workplace benefits, like health insurance. Instead, individuals with disabilities might receive public assistance from government programs like Supplemental Security Income and Medicaid.

Supplemental Security Income (SSI) is a needs-based program that provides payments for individuals with disabilities. Medicaid is a federal health insurance program that helps vulnerable and low-income individuals. Health coverage through Medicaid is much more affordable than buying an individual health plan.

As part of their estate planning, parents might wish to leave assets and property for their child with special needs. But such an inheritance will likely disqualify the child from receiving government benefits, since he or she will surpass the income and asset restrictions.

If you want to ensure that a person with disabilities continues to receive benefits when you pass away, you might consider opening a special needs trust. Money and assets in this type of trust are not counted as the beneficiary’s assets, so the individual with disabilities can still qualify.

Additionally, a special needs trust can ensure the money will be in a safe place and can only be used according to the terms of the trust over the course of your child's life.

In this article:

Who is eligible for a special needs trust?

Special needs trusts don’t have eligibility requirements. Rather it is simply a type of irrevocable trust — a trust that cannot be changed — that is intended for a person with disabilities and drafted in such a way as to benefit their situation.

A person with disabilities, permanent or temporary, may benefit from a special needs trust if they:

  • Receive Supplemental Security Income (SSI)
  • Receive Medicaid benefits
  • May need to receive SSI or Medicaid benefits in the future
  • Cannot manage their finances

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Other government programs like Social Security Disability Insurance (SSDI) and Medicare do not have an income and asset eligibility requirement, so you won’t need a special needs trust to qualify for these benefits.

SSDI is a federal government insurance program that pays out a benefit when you are unable to work because of a disability. However, since it is difficult to qualify for SSDI, others may choose to protect themselves by getting disability insurance.

How does a special needs trust work?

A special needs trust functions just like any other trust. A grantor creates the trust and transfers assets into it. The assets in the trust are now owned by the trust and not by the beneficiary or grantor. You can even designate the special needs trust as the beneficiary of payable-on-death accounts, like a life insurance policy or a retirement plan.

The trust is managed by a trustee, who is responsible for the funds, including distributing them according to the terms set by the grantor. When the primary purpose of a special needs trust is to continue receiving government benefits, the trustee must be extra careful to follow a few guidelines, so they don't accidentally violate the eligibility of the child with special needs child. You can hire a professional trustee, like a bank or an attorney or a special needs planner.

The trustee will make purchases using the trust funds for the benefit of the disabled person. It is essential that the individual with disabilities does not receive any cash payments from the trust, or else it might be considered income. (We’ll discuss more about what expenses a special needs trust can pay for next.)

And if you don't have any dependents with special needs, you might only need a revocable trust to help distribute your assets. The Policygenius app can help you start an estate plan that includes both a will and a trust.

First-party special needs trust

A self-settled or first-party special needs trust is funded by the disabled individual’s own assets, such as when they receive a payout from a personal injury settlement or divorce settlement.

It can be opened by the disabled individual, so long as they are of sound mind and mental competence, or it can be opened by a parent or grandparent.

Opening a first-party special needs trust with the hopes of qualifying for public assistance at some point can get tricky — you must operate within government guidelines to make sure these assets aren’t counted as your own. It might be helpful to talk to a lawyer so you can get legal advice on how to operate the trust. First-party special needs trusts also require you to send reports and accountings to the state on an annual basis.

Third-party special needs trust

This type of special needs trust is funded by someone other than the beneficiary, such as when a parent or grandparent creates a trust for their child with disabilities. The information in this article mainly pertains to third-party special needs trusts.

What can the funds in a special needs trust be used for?

The funds in a special needs trust are meant to supplement government benefits and improve the quality of life of the beneficiary with disabilities.

If you set up the special needs trust primarily for a disabled person to keep their government benefits, then you (and the trustee) should keep in mind certain restrictions. Money that can be spent towards basic necessities, like food and shelter, is considered income by the government.

Therefore funds in a special needs trust should not be used on the following:

  • Food
  • Housing (rent or mortgage)
  • Property insurance
  • Property taxes
  • Utilities (heat, gas, electricity, water, sewer, garbage removal)

Money that is used for food and shelter can reduce the SSI payment, dollar for dollar, up to a certain amount. (In some cases, it may make sense for the special needs trust to pay for some of the items listed above, even though it reduces SSI payment. You can consult with a special needs attorney or an estate planning attorney to learn more about what’s best in your situation.)

You can use the trust funds for the following:

  • Clothing
  • Furniture and household goods
  • Personal care products
  • Health care costs, including out-of-pocket-medical expenses
  • Caretakers
  • Transportation
  • Education
  • Entertainment
  • Travel
  • Burial costs

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Personal Finance Editor

Elissa Suh

Personal Finance Editor

Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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