A guide to special needs trusts

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



Elissa Suh

Elissa Suh

Personal Finance Editor

Elissa Suh is a personal finance editor at Policygenius in New York City. She has researched and written extensively about finance and insurance since 2019, with an emphasis in estate planning and mortgages. Her writing has been cited by MarketWatch, CNBC, and Betterment.

Updated December 2, 2020|5 min read

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Key Takeaways

  • A special needs trust is primarily used to help a person with disabilities retain eligibility for government benefits, like Medicaid and Supplemental Security Income

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

  • Trust funds typically shouldn’t be spent on basic necessities, like food and shelter, but can be used on supplemental needs like transportation

  • The person with special needs is the beneficiary of the trust

A special needs trust provides regular income to a person with disabilities without disqualifying that person from government assistance programs such as Medicaid and Supplemental Security Income (SSI). Both of these programs have income and asset limits for recipients. (Other aid programs, like Medicare and Social Security Disability Insurance, don’t have income limits.)

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. SNTs are all irrevocable trusts and work much like other irrevocable trusts. However, 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. For example, any funds spent on food or housing could qualify as income and affect SSI or Medicaid eligibility.

For more guidance on special needs planning, whether for yourself, a child, or someone else, it’s best to talk with an attorney or special needs planner. If you’re planning specifically for an elderly individual, you may want a lawyer who specializes in elder law.

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What is a special needs trust?

A special needs trust (SNT) is one type of irrevocable trust — a trust that cannot be changed after creation. It works like other irrevocable trusts, but a special needs trust is 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, like Medicaid. People commonly use this type of trust to help pay for the care of a child with special needs.

(If you don't have dependents with special needs, you might benefit more from a revocable trust, which you can now set up using Policygenius.)

Learn more about trusts.

Should you use a special needs trust?

A person 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

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.)

How does a special needs trust work?

Like other trusts, a special needs trust is created by a grantor (also called a trustor) who transfers money or other assets into the trust. The assets are then owned by the trust and not by the grantor or beneficiary. The beneficiary is the person receiving money or property from the trust. In this case, the person with special needs is set as the beneficiary.

The trust is then managed by a trustee, who is responsible for the assets. The trustee distributes funds according to the terms set by the grantor (in the founding trust document) and if the trustee is also the beneficiary’s caretaker, they will have the right to make purchases or payments with the trust funds.

Just about anyone can serve as a trustee but special needs trusts require caution to ensure the trustee doesn’t use trust money in a way that disqualifies the beneficiary from receiving government benefits. You can also hire a professional trustee, like an attorney or a special needs planner, who has a fiduciary responsibility.

Related article: How to get life insurance for someone for someone with disabilities

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 using the funds on certain types of expenses could disqualify the beneficiary from receiving the benefits. In general, money that can be spent towards someone’s basic necessities, like food and shelter, is considered income by the government. As an example, using trust funds on food while receiving SSI could reduce the beneficiary’s SSI payment dollar for dollar, up to a certain amount.

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

Types of special needs trusts

All SNTs work in the same basic way, there are 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 funds 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 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. 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.

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. (The information in this article mainly pertains to 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; as explained above, those payments might be considered income and limit the beneficiary’s eligibility for government programs.

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.