What is a special needs trust?

Provide for a family member or loved one with special needs without disqualifying them from governmental benefits

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Elissa SuhSenior Editor & Disability Insurance ExpertElissa Suh is a disability insurance expert and a former senior editor at Policygenius, where she also covered wills, trusts, and advance planning. Her work has appeared in MarketWatch, CNBC, PBS, Inverse, The Philadelphia Inquirer, and more.

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A special needs trust, or supplemental needs trust, can help provide money for a person with disabilities without disqualifying them from receiving governmental benefits such as Medicaid and Supplemental Security Income (SSI). Both of these assistance programs have income and asset limits for recipients. (Other aid programs, like Medicare and Social Security Disability Insurance, don't have income restrictions.)

There are multiple types of special needs trusts, based primarily on whether someone funds a trust for their own use or for someone else's. All SNTs are all irrevocable and work much like other irrevocable trusts. The trustee must be careful with how trust funds are used, because certain expenses could cause the funds to be construed as the trust beneficiary's income.

Whether you're interested in a special needs trust for yourself, a child, or someone else as part of your estate plan, it's best to talk with an attorney or special needs planner since they can be tricky to set up.

Key takeaways

  • With this type of trust, the person with special needs is designated as the trust beneficiary.

  • Special needs trust must be properly constructed and managed by the trustee in order for it to work on behalf of the beneficiary.

Who should get a special needs trust?

Someone with permanent or temporary disabilities 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 own finances

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Other government programs like Social Security Disability Insurance (SSDI) and Medicare do not have an income or asset eligibility requirement, so you won't need a special needs trust to qualify for these public benefits. (And since it is difficult to qualify for SSDI, you may choose to instead protect yourself by getting disability insurance.)

People commonly use this type of trust to help pay for the care of a child or family member with special needs who is the beneficiary of the trust

Types of special needs trusts

Here three types of special needs trusts you may hear about:

  • A first-party special needs trust is created by the person who will ultimately use the trust assets.

  • A third-party special needs trust is created for the benefit of someone else.

  • A pooled special needs trust is created by a nonprofit organization and benefits multiple beneficiaries.

→ Learn more about other types of trusts

First-party special needs trust

A first-party special needs trust, also called a self-settled special needs trust, is funded by an individual who will one day use the trust property for themselves. First-party special needs trusts are more commonly opened after someone receives a payout from a personal injury settlement, inheritance, or divorce settlement.

The person creating the trust may already be living with a disability or they may be planning for the future. Individuals with disabilities or chronic illnesses can open trusts for themselves so long as they are of sound mind. 

But opening a first-party special needs trust with the hopes that you can qualify 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. Consider talking to a lawyer for legal advice on how to operate the trust. First-party special needs trusts also require you to send annual reports and accountings to your state.

→ Related article: Learn about asset protection trusts

Third-party special needs trust

A third-party special needs trust is funded by someone other than the special needs beneficiary, such as when a parent or grandparent creates a trust for their child with disabilities. (This article is mostly focused on third-party special needs trusts.)

The trustee will make purchases using the trust funds for the benefit of the beneficiary. It is essential that the individual with disabilities does not receive any cash payments from the trust, since those payments might be considered income and limit the beneficiary's eligibility for government programs.

→ Learn about the difference between a beneficiary and trustee

Pooled special needs trust

Pooled trusts, sometimes called community trusts, are run by nonprofit organizations that invest funds from multiple families (or other sources) in order to support multiple beneficiaries. A pooled trust may be helpful if you want to help provide for someone with special needs but you either don't want to create a trust yourself or don't have much to contribute to it.

How it works: special needs trust rules

A special needs trust it needs to be created in such a way that a person with disabilities or a chronic illness can receive income from the trust — without receiving enough to disqualify them from income-restricted government programs.

Special needs trusts are irrevocable

As an irrevocable trust — a trust that cannot be changed after creation — the SNT should relinquish any ties the grantor and beneficiary might have over trust property. The beneficiary is the person who benefits from the trust, which in this case is the person with special needs.

The trust is then managed by a trustee, who is responsible distributing funds according to the original terms set by the grantor in the trust agreement. If the trustee is also the beneficiary's caretaker, they typically have the right to make discretionary distributions or purchases or payments on behalf of the beneficiary with the trust funds.

Just about anyone can serve as a trustee, who has a fiduciary responsibility to your best interests. But, administration for a special needs trust requires extra caution on the trustee’s part since they have to follow certain guidelines to make sure the funds are used in a certain way. For this reason some people choose to hire a professional trustee, like an attorney or a special needs planner.

→ Read about when a trustee can withdraw money from a trust

Using special needs trust funds

The money in a special needs trust is meant to supplement government benefits and using the funds on certain types of expenses could disqualify the beneficiary from receiving the benefits. In general, the money in the trust that can be spent towards someone's basic necessities, like food and shelter, is considered income by the government. For example, using trust funds on food while receiving SSI could reduce the beneficiary's SSI payment dollar for dollar, up to a certain amount, so it’s important to follow a few rules.

You should not use funds from a special needs trust for these expenses:

  • Food

  • Housing (rent or mortgage)

  • Property insurance

  • Property taxes

  • Utilities (heat, gas, electricity, water, sewer, garbage removal)

(In some cases, it may still make sense for the special needs trust to pay for some of the items listed above, even though it reduces SSI payment. 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 funds from a special needs trust for the following expenses:

  • Caretakers

  • Clothing

  • Furniture and household goods

  • Health care costs, including out-of-pocket-medical expenses

  • Personal care products

  • Transportation and travel

  • Education

  • Entertainment

  • Burial costs

→ Read more out how trust assets are distributed to beneficiaries

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