What Is a Special Needs Trust and Who Needs One?

If you love someone with a disability, you want to make sure they are cared for, today and long after you are gone. A special needs trust is one of the most important tools for doing that. Here is what it is and who may need one.

The Problem a Special Needs Trust Solves

Many people with disabilities depend on needs-based public benefits like Supplemental Security Income (SSI) and Medicaid. These programs have strict limits on how much a person can own. If your loved one inherits money directly or receives a settlement, they could lose eligibility until those funds are spent down.

A special needs trust holds money for the person’s benefit without giving them direct ownership. When set up and managed properly, the trust can pay for things that improve quality of life while helping protect eligibility for benefits.

Two Main Types

Third-Party Special Needs Trusts

A third-party trust is created and funded by someone other than the person with a disability, usually parents or grandparents, as part of their estate plan. Because the money never belonged to the beneficiary, any funds left after the beneficiary’s death can generally pass to other family members.

First-Party Special Needs Trusts

A first-party trust holds money that belongs to the person with a disability, such as an inheritance received directly or a lawsuit settlement. These trusts must meet specific legal requirements and usually include a provision to repay Medicaid after the beneficiary’s death.

Who Needs One?

You may want to consider a special needs trust if:

• You have a child, grandchild, or other relative with a disability who receives or may need benefits
• You want to leave an inheritance to a loved one with a disability
• A person with a disability is about to receive a settlement or inheritance
• You want to name someone to manage funds for a loved one who cannot manage money on their own

What Can the Trust Pay For?

Generally, a trustee can use funds for things that go beyond what benefits provide, such as therapies, education, recreation, travel, equipment, and personal care. Certain kinds of payments can affect benefits, so trustees should get guidance before making distributions.

Don’t Forget the Rest of the Plan

A trust only works if gifts reach it. Wills, life insurance, and retirement account beneficiary designations should name the trust rather than the person directly. Relatives who want to help should be told to do the same.

Learn More

Visit our page on first-party and third-party special needs trusts, read about guardianship options as a child reaches adulthood, or explore our broader elder law services.