Leaving money directly to someone receiving government benefits can disqualify them from programs they need. Special needs trusts solve this problem—allowing families to provide for disabled loved ones without jeopardizing benefits. Understanding these trusts helps families plan effectively for disabled beneficiaries.

The Problem Special Needs Trusts Solve

Many disabled individuals receive need-based benefits like SSI, Medicaid, housing assistance, and food stamps. These programs have strict resource limits—typically $2,000 for individuals. An inheritance, lawsuit settlement, or gift can push them over the limit and eliminate their benefits.

Without benefits, the inheritance might quickly be spent on medical care and basic needs—leaving the person with neither the money nor the benefits.

How Special Needs Trusts Work

A properly drafted special needs trust holds assets for a disabled beneficiary while not counting toward resource limits. The trustee can use funds to enhance the beneficiary's quality of life without replacing government benefits.

Trust distributions are used for things benefits don't cover—education, recreation, personal items, travel, therapies, and supplemental care.

Third-Party vs. First-Party Trusts

Third-party special needs trusts are funded by someone other than the beneficiary—typically parents or grandparents. These trusts have the most flexibility. When the beneficiary dies, remaining assets can pass to family members.

First-party special needs trusts (also called self-settled or d(4)(A) trusts) are funded with the beneficiary's own money—often from an inheritance, lawsuit settlement, or personal injury award. Medicaid must be repaid from these trusts upon the beneficiary's death before other beneficiaries receive anything.

Pooled Trusts

Pooled trusts are managed by nonprofit organizations and combine assets from multiple beneficiaries for investment purposes. Individual accounts track each beneficiary's share. Pooled trusts are useful when amounts are too small for individual trusts or professional management is desired.

Pooled trusts can be either third-party or first-party, with different rules applying to each.

What Trusts Can Pay For

Special needs trusts should supplement—not replace—government benefits. Appropriate distributions include education and training, electronics and entertainment, travel and vacations, personal care items, therapies not covered by benefits, home modifications, and vehicle purchases or modifications.

Trustees must be careful not to pay for things that would reduce SSI or cause Medicaid problems—like paying rent directly to a landlord (which can reduce SSI).

What to Avoid

Direct cash distributions to the beneficiary count as income and can reduce or eliminate benefits. Food and shelter payments may be treated as in-kind support and maintenance. The trustee must understand complex benefit rules to avoid missteps.

Choosing a Trustee

Trustees of special needs trusts have challenging jobs—balancing benefit preservation with quality of life enhancement. Choose trustees who understand benefit rules or will work with professionals who do. Options include family members, professional trustees, or pooled trust administrators.

ABLE Accounts

ABLE accounts are tax-advantaged savings accounts for disabled individuals. They can hold up to $100,000 without affecting SSI. ABLE accounts are simpler than trusts but have contribution limits. They can complement trusts but don't replace them for larger amounts.

Funding the Trust

Third-party trusts can be funded during life or at death through wills or beneficiary designations. Tell family members to leave inheritances to the trust, not directly to the disabled person. Life insurance naming the trust as beneficiary is a common funding method.

Getting Legal Help

Special needs trusts require attorneys experienced in both trust law and government benefit programs. Mistakes can cost beneficiaries their benefits. Proper drafting ensures the trust accomplishes its purpose while meeting all legal requirements.