If you are a parent of a child with special needs, a special needs trust (SNT) should be an essential part of your estate planning. Without one, leaving assets directly to your child—whether through a will or by default under intestacy laws—could jeopardize their eligibility for needs-based government benefits like Supplemental Security Income (SSI) and Medicaid.
What is a Special Needs Trust?
A Special Needs Trust is a legal arrangement that holds money and property for a disabled beneficiary. A trustee manages the assets and decides when, how, and for what purpose to make distributions. Because the beneficiary does not control the assets, the funds in the trust are not counted as the beneficiary’s own resources for needs-based programs such as SSI and Medicaid.
- SSI is a federal program that provides monthly financial assistance to disabled individuals with limited income and resources.
- Medicaid is a health insurance program for low-income individuals. In many states, people receiving SSI automatically qualify for Medicaid, which can help pay for expensive medical care. Losing these benefits can be catastrophic.
Why Does Special Needs Planning Matter?
SSI and Medicaid have strict financial limits. In most cases, a single person must own less than $2,000 in countable assets to qualify. An inheritance or large gift received directly can push your child over that limit and cause a loss of benefits. A properly drafted and funded special needs trust prevents that result.
Many parents, in an effort to preserve benefits, consider disinheriting their child, but this approach leaves the child financially vulnerable. A special needs trust solves this issue by protecting assets while ensuring continued access to government aid.
How Does a Special Needs Trust Work?
Not all trusts protect benefits. A traditional “support trust,” which directs the trustee to pay for the beneficiary’s health, education, maintenance, and support, can cause assets to be treated as available to the beneficiary. A Special Needs Trust is different. It authorizes, but does not require, the trustee to make distributions for supplemental needs. That difference in discretion is what preserves Medicaid eligibility.
How Does an SNT Preserve Benefits?
A special needs trust is a discretionary trust, which means the trustee has complete authority to decide when distributions are made. The beneficiary cannot demand payments or control the property in their trust. When drafted and administered correctly, the beneficiaries of a special needs trust can continue to receive government benefits, while still enjoying the benefits of the property in the trust for supplemental needs.
What Can a Trust Pay for?
Every family is different, but trust funds are often used for things like uncovered medical and dental care, therapies and assistive devices, education and job training, transportation, caregiving support, adaptive recreation, computers and internet service, and travel to visit loved ones. The goal is to supplement, not replace, public benefits.
Who Can Be a Trustee of an SNT?
The trustee’s role is part financial manager, part benefits gatekeeper, and part record-keeper. A trusted family member may know your child best and may serve well, especially with guidance from an attorney. A professional trustee, such as a bank trust department or trust company, brings experience with investment management and public benefits rules. Many families use both, naming a family member and a professional to serve together or to step in at different times.
When choosing, consider temperament, availability, financial literacy, and the ability to say no when a distribution could jeopardize benefits. Clear instructions in the trust document, including a nonbinding letter of intent that describes your child’s routines, preferences, and goals, will help the trustee make thoughtful decisions.
If you are named trustee, you do not have to figure out the job alone. The Special Needs Alliance publishes a free trustee handbook that is updated each year. It explains the difference between self-settled and third-party trusts, which distributions can be made without jeopardizing government benefits, how to keep good records, and when to seek professional advice about tax or investment questions. Must trusts also authorize trustees to hire attorneys and financial advisors to ensure property administration of the trust.
How Do I Set Up a Special Needs Trust?
Families usually choose between these options.
Testamentary Special Needs Trust. This trust is built into a parent’s Last Will and Testament or Revocable Living Trust and springs into effect at death. Assets pass into the trust under the estate plan, so the child never receives them outright. This works well when all funding will occur later.
Stand-Alone, or inter vivos, Special Needs Trust. This trust is created during life and can receive assets immediately. Relatives can make gifts to it, and you can name it as beneficiary of life insurance, brokerage accounts, and in some cases retirement plans. This is helpful when grandparents want to contribute now or when life insurance will be the primary funding source.
How Many Types of SNTs Are There?
It also helps to understand the types of Special Needs Trusts.
Third-party Special Needs Trust. Funded with someone else’s assets, such as a parent’s or grandparent’s. There is no Medicaid payback at the beneficiary’s death, so remaining assets can pass to other family members as you direct.
First-party Special Needs Trust. Funded with the beneficiary’s own money, such as a personal injury settlement or an inheritance received by mistake. Federal law requires that any funds left at the beneficiary’s death first reimburse the state for Medicaid benefits provided during the beneficiary’s lifetime.
Pooled Trust. Managed by a nonprofit that “pools” investments for multiple beneficiaries while keeping sub-accounts separate. This can be a practical option when a professional trustee is needed and the trust will be modest in size.
How Do I Fund the Trust?
You can fund a Special Needs Trust during life, at death, or both. Common resources for funding the trust include life insurance, investment accounts, retirement accounts, and gifts from relatives. It is important to coordinate beneficiary designations with the trust instead of naming your child directly. Retirement accounts require special planning to balance tax rules with benefit protection, so get advice before naming the trust on an IRA or 401(k).
How an SNT fits with other tools
An ABLE account can complement a trust. ABLE accounts allow eligible individuals to save in their own name up to annual limits without losing benefits, and can be ideal for small, frequent expenses. A Special Needs Trust, by contrast, can hold larger sums, accept gifts from many sources, and provide trustee oversight. Many families use both, with the trustee funding the ABLE account when helpful.
Getting Help Setting Up a Special Needs Trust
Setting up a special needs trust requires careful legal planning to ensure compliance with federal and state laws. An estate planning attorney can help:
- Draft a legally sound trust document.
- Ensure the trust meets SSI and Medicaid requirements.
- Determine the best type of trust based on your family’s needs.
Should I Disinherit My Child to Protect Benefits?
No. Parents ask this out of love, but disinheriting a child with special needs usually leaves that child more vulnerable, not less. A common version of the plan is to leave everything to a sibling or relative with an understanding that he or she will “take care of” the child. That arrangement has three problems:
- The relative becomes the legal owner and has no legal obligation to use the money for your child. Intentions change.
- The money is exposed to the relative’s own creditors, lawsuits, and divorce.
- If the relative dies first, the money passes to his or her heirs, who made no promise to you.
A special needs trust solves the same problem without those risks: the trustee is legally bound to use the funds for your child, and the trust is not counted against the benefit limits. See protecting your children’s inheritance with a trust.
A Stand-Alone Trust Still Needs a Will
Several parents have come to me wanting a stand-alone special needs trust so grandparents and other relatives could make gifts right away. That is a good reason to create one. But the trust does not replace your will. Without a will directing your property to the trust, your own estate may pass to your child outright under the intestacy statutes, which is exactly what the trust was meant to prevent. The will, the trust, and your beneficiary designations have to work together.
More Examples of Supplemental Expenses
Beyond the categories above, trustees commonly pay for:
- Dental work, eyeglasses, and medical procedures or equipment Medicaid does not cover
- Rehabilitative and occupational therapy, supplemental nursing care, and private case management
- Health insurance premiums
- Phone, internet, television, computers, and other electronics
- Training and education programs, books, and reading materials
- Vacations, movies, cultural events, and companionship
- Travel costs to visit relatives and friends
Payments for food and shelter need extra care because they can reduce SSI. A trustee should understand those rules before paying rent, mortgage, or utilities. An ABLE account can sometimes be used for those expenses without the same reduction.
First-Party Trusts a Person Can Create for Himself or Herself
Until December 13, 2016, federal law allowed only a parent, grandparent, guardian, or court to establish a first-party special needs trust. Adults with disabilities who had full legal capacity could not set one up for themselves.
The Special Needs Trust Fairness Act, part of the 21st Century Cures Act, changed that. A competent adult with a disability can now create his or her own first-party trust, for example after receiving a personal injury settlement or an inheritance that was left outright. As with every first-party trust, Medicaid must be repaid from what remains at the beneficiary’s death.
Two more points distinguish the first-party and third-party trusts. A first-party trust can be established only for a beneficiary who is under age 65 and who meets the Social Security Administration’s definition of disabled, and it must be irrevocable. A third-party trust has no age limit, and almost anyone other than the beneficiary can create one, including through a will. A spouse can also be the beneficiary of a special needs trust created in a will.
More About Pooled Trusts
To use a pooled trust, the family signs a joinder agreement with the nonprofit, which sets the terms. Each beneficiary has a separate sub-account that only he or she benefits from, while the nonprofit invests the funds together to reduce costs. Pooled trusts can hold first-party or third-party funds.
The trade-off is control. A pooled trust is less flexible than a trust you design, and you give up direct say over investments and distributions. In exchange, you get professional administration, low setup costs, and continuity, because there is no risk of an individual trustee dying or losing interest. In Texas, The Arc of Texas operates a well-known master pooled trust.
Writing a Letter of Intent
Legal documents decide who manages money and makes decisions. They do not tell a future caregiver how your child likes to start the day, what calms him or her down, or which doctor has known your child since birth. A letter of intent fills that gap. It is not legally binding, has no required format, and can be updated as often as you like. A useful letter covers:
- Family information, important relationships, traditions, and religious or cultural practices
- Current living arrangements and preferences for the future
- Education, IEP details, how your child learns best, and work or vocational goals
- Diagnoses, medications, allergies, providers, therapies, and assistive devices
- Daily routines, personal care, diet, behavior, and what helps in difficult moments
- Benefits, the trust, guardianship status, and who to contact about finances
- Hobbies, friendships, and activities your child enjoys
Keep the letter with your estate planning documents and give copies to the guardian and trustee. Some families also use a secure online tool such as Vest to store this information and share selected categories with caregivers, teachers, and relatives, with the ability to update or revoke access at any time.
A Checklist for Parents
- Start now. A basic plan can be updated as your child’s needs change.
- Never leave assets to your child outright in a will, including through a trust that is not designed to protect benefits.
- Name the special needs trust as beneficiary of life insurance and other accounts instead of your child.
- Choose trustees carefully and name successors, possibly combining a family member with a professional.
- Talk to grandparents and relatives so their gifts go to the trust, not directly to your child.
- Plan for decisions, not just money. If your child will need help as an adult, consider guardianship, powers of attorney, or a supported decision-making agreement, depending on his or her abilities.
- Write a letter of intent and keep it current.
- Review the plan regularly as laws, benefits rules, and your family change.
Special Needs Trust FAQs: Common Questions Answered
Can My Child Control Assets in an SNT?
No. To preserve eligibility, the beneficiary cannot own or control trust assets. The trustee has discretionary authority and must follow the trust terms.
Will the Trust Affect SSI or Medicaid?
A properly drafted and administered Special Needs Trust should not count as the beneficiary’s resource. Poor drafting or improper distributions can cause problems, which is why guidance matters.
What Can Trust Funds Be Used For?
Funds from an SNT can be used for many expenses that enhance the quality of life of the beneficiary’s life, such as medical care not covered by Medicaid, therapies, education, transportation, adaptive equipment, recreation, and travel. Careful planning is needed for food and shelter, since those payments may reduce SSI.
Can Other Family Members Contribute to an SNT?
Yes. With a stand-alone third-party trust, relatives and friends can make lifetime gifts or leave inheritances directly to the trust.
Protect Your Child’s Future
A special needs trust ensures that your child receives financial support without risking government benefits. By setting up an SNT as part of your estate planning, you can secure their future while maintaining their quality of life.
Consult a special needs planning attorney to discuss the best special needs trust option for your child.
