What Is a Special Needs Trust?

  • December 1st, 2023

Closeup of person's hands handing dollar bills to someone else.If a person with special needs has assets – from a lawsuit award or settlement or from a gift or inheritance – those assets can disqualify the person from receiving essential public benefits like Medicaid and Supplemental Security Income (SSI). 

A special needs trust can allow the person with special needs – the trust’s beneficiary – to remain eligible for needs-based public benefits while at the same time preserving the assets to enhance the beneficiary’s quality of life.

Why a Special Needs Trust?

Special needs trusts are intended to supplement, not replace, the kind of basic support that programs like Medicaid and SSI provide. These trusts pay for anything the trust document provides for, including comforts and luxuries that meager public assistance funds don't cover.  A special needs trust has been likened to a “parent's pocket” – that is, it pays for the kinds of things that a parent would just reach into their pocket to cover. These trusts typically pay for amenities beyond the simple necessities of life, things like education, recreation, counseling, and medical attention. 

Special Needs Trusts Spending Rules Are Specific

Funds held in a properly drafted special needs trust should not affect a Medicaid or SSI recipient’s benefits. But problems can develop when funds from a special needs trust are spent. Because the rules are very complicated, it is best to sit down with a special needs planner to discuss what you intend to do with your trust before making any payments to anyone.

Main Types of Special Needs Trusts

There are two main types of special needs trusts: first-party and third-party trusts. 

  • First-party (or self-settled) trusts are used when the trust assets belong to a person with special needs, perhaps from an award or settlement. 
  • Third-party trusts are generally used when a parent or guardian wishes to establish and fund a trust for the benefit of a person with special needs, usually a minor child.
  • A  pooled trust contains the funds of many people with special needs and may be appropriate for some people.

A qualified special needs planner can walk you through the pros and cons of each type of trust and help you to properly establish one.

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For more on special needs trusts, see: The Top 7 Reasons to Establish a Special Needs Trust and What Can a Special Needs Trust Pay For?


Created date: 04/24/2020

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