Special Needs Trusts FAQs: Answers for Parents of Children with Special Needs

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 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.

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.

How Do I Set 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.

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 my 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.

This article was initially published on October 11, 2010 and updated on April 22, 2025.