What Is a Special Needs Trust?

For families caring for loved ones with disabilities, financial planning takes on unique challenges. One powerful tool designed specifically for these situations is a Special Needs Trust. This specialized legal arrangement helps protect assets while maintaining eligibility for crucial government benefits.  

Let's explore what these Trusts are, how they work, and why they might be essential for your family's financial plan. We asked Ashley Higginbotham, Supervising Attorney at Deming Parker, LLC, and LegalShield provider lawyer, to weigh in with some professional insight.

What is a Special Needs Trust?

A Special Needs Trust (sometimes called a Supplemental Needs Trust) is a legal arrangement designed to help individuals with disabilities maintain access to essential government benefits while still receiving additional financial support. These Trusts hold and manage assets for a person with disabilities, without those assets counting toward asset limits for programs like Supplemental Security Income (SSI) and Medicaid.

"A Special Needs Trust (SNT) is a legal arrangement which allows a special needs or disabled person to maintain his or her government assistance benefits such as Medicaid and Supplemental Security Income (SSI) while also being able to benefit from the assets placed in a Trust. As eligibility for Medicaid, Supplemental Security Income (SSI), and food stamps require that an individual has limited income and assets, the SNT is set up to be the owner of the assets." — Ashley Higginbotham, Supervising Attorney at Deming Parker, LLC

The primary purpose of these Trusts is straightforward: to enhance the quality of life for a person with disabilities without jeopardizing their eligibility for government assistance programs that often have strict financial requirements.

What is a Disability Trust?

A Disability Trust is essentially another name for a Special Needs Trust. Unlike general Trusts, Disability Trusts have specific provisions that comply with Social Security Administration and Medicaid regulations.

Ashley pointed out, "A Special Needs Trust is a Disability Trust. There is no difference. In order to properly qualify as a Special Needs Trust, the language of the Trust should be approved by the Social Security Administration to ensure the enforceability. Additionally, while both SSI and Medicaid are federally funded, Medicaid eligibility requirements vary from state to state.”

These specialized Trusts are essential for a few different reasons:

• They prevent direct ownership of assets by the beneficiary.
• They include specific language about supplementing (not replacing) government benefits.
• They give Trustees discretion over distributions to maintain benefit eligibility.

To maintain eligibility for public assistance programs, Disability Trusts must be properly structured and managed according to federal and state regulations. This typically requires working with an attorney for special needs planning.

Types of Special Needs Trusts

Special Needs Trusts come in several varieties, each designed for different situations and funding sources. Understanding these differences is crucial for choosing the right option.

First-party Special Needs Trust

A First-party Special Needs Trust (also called a Self-settled Trust) is funded with the beneficiary's own assets. These might include:

• Personal injury settlements
• Inheritance received directly by the person with disabilities
• Accumulated savings or other personal assets

Ashley defines this type of Trust in more depth: "A First-party SNT is a 'self-funded' trust, meaning that the assets that are being placed in the Trust are assets which are owned by the special needs individual. Attorneys regularly establish these sorts of Trusts when a personal injury or medical malpractice claim is won for the special needs individual or if the special needs individual is able to work some and earnings potentially will be higher than the asset limit.”

First-party Trusts include these key characteristics:

• They must include a Medicaid payback provision that reimburses the state for benefits provided after the beneficiary's death.
• The beneficiary must be under age 65 when the Trust is established.
• They must be irrevocable.
• They can be by court order or are established by a parent, grandparent, legal guardian, or court.

Third-party Special Needs Trust

A Third-party Special Needs Trust is created and funded by someone other than the beneficiary, typically parents, grandparents, or other family members. These Trusts offer significant advantages:

• No Medicaid payback requirement after the beneficiary's death
• Greater flexibility in how remaining assets are distributed after the beneficiary passes away
• Can be funded through estate planning tools like Wills, life insurance, or inter-vivos gifts

"A third-party SNT is a Trust that is funded by anyone other than the special needs individual. Attorneys regularly establish these for inheritance purposes so that upon the death of a parent, grandparent, or loved one, the inheritance can be used to care for the special needs individual,” says Ashley Higginbotham.

Third-party Trusts are ideal when family members want to provide for a loved one without disrupting their benefits or when planning ahead through an estate plan.

Ashley notes, "I regularly suggest to my clients of special needs children to establish a SNT in their Will so that their special needs child may still get government assistance and be able to inherit from his parents' estate."

Pooled Special Needs Trust

A Pooled Special Needs Trust is managed by a nonprofit organization that pools resources from multiple beneficiaries for investment purposes while maintaining separate accounts for each individual. These Trusts offer:

• Professional administration at lower costs
• Accessible option for those with smaller asset amounts
• Community of families with similar needs
• Option for both first-party and third-party funding

Pooled Trusts can be especially valuable for beneficiaries without suitable Trustees or for families with limited resources to establish and manage an individual Trust.

Benefits of a Special Needs Trust

Special Needs Trusts offer numerous advantages beyond basic asset protection:

• Preserve government benefits like Medicaid, SSI, housing assistance, and food stamps
• Professional financial management through a Trustee who understands the beneficiary's unique needs
• Protection from financial exploitation or poor financial decisions
• Long-term security that continues after parents or caregivers pass away

Perhaps most importantly, these Trusts provide peace of mind for families concerned about their loved one's future care and quality of life.

What kind of assistance does a Special Needs Trust provide?

Funds from a Special Needs Trust can supplement expenses not covered by government benefits, such as:

• Enrichment activities: education, recreation, entertainment, and vacations
• Personal care: additional therapy services, private nursing, or caregiving beyond what Medicaid covers
• Housing enhancements: home furniture
• Transportation: vehicle purchase, maintenance, insurance, and other transportation costs
• Technology: computers, smartphones, specialized assistive devices
• Quality of life expenses: clothing, personal items, hobby supplies

"A SNT is an invaluable tool to provide assistance to a special needs individual to help pay for their day-to-day needs that wouldn't otherwise be covered with the limit assets from SSI. The Trustee of a SNT usually has broad discretion in using the funds for the best interest of the special needs individual, so the funds can be used for medical care and also for more fun things like going to the movie, taking the person out to dinner or an event, or enrolling the person in a class." — Ashley Higginbotham.

Importantly, Trust distributions should never be made directly to the beneficiary as cash.

How does a Special Needs Trust work?

A Special Needs Trust involves several key roles:

1. Grantor/Settlor: The person who establishes and funds the Trust
2. Trustee: The person or organization responsible for managing Trust assets and making distributions
3. Beneficiary: The person with disabilities who benefits from the Trust

The Trustee manages the assets according to the Trust document's instructions, making distributions that enhance the beneficiary's quality of life without jeopardizing government benefits. This requires careful consideration of how funds are spent.

Funding a Special Needs Trust

Funding a Special Needs Trust can be accomplished through various assets:

• Cash and investments: Stocks, bonds, mutual funds, and other financial assets
• Life insurance: Often using a second-to-die policy that pays out after both parents pass away
• Real estate
• Regular contributions: Family members can make ongoing donations
• Inheritance designations: Directing inheritance through a Will or beneficiary designation

When planning Trust funding, consider these important points:

• Future needs and life expectancy of the beneficiary
• Inflation and increasing medical/care costs
• Professional management fees
• Tax implications of different funding methods

Working with a lawyer for special needs planning can help determine the right funding amount and strategy.

Are Special Needs Trusts revocable or irrevocable?

Special Needs Trusts are typically irrevocable, meaning once established, they cannot be easily changed or terminated.  

Ashley says, "Once the SNT is funded, it is irrevocable, but funding is triggered by different things and certain portions of the SNTs can still be modified.”

While Third-party Trusts established during the grantor's lifetime can sometimes include provisions allowing amendments while the grantor is alive, first-party special needs trusts must be irrevocable from creation to maintain benefit eligibility.

Do Special Needs Trusts affect SSI and Medicaid?

When properly structured, Special Needs Trusts are designed specifically to not affect SSI and Medicaid eligibility. However, improper Trust administration can jeopardize benefits. Common mistakes include:

• Making direct cash distributions to the beneficiary
• Choosing the wrong Trustee  
• Using Trust funds for expenses already covered by government benefits
• Failing to maintain proper documentation of expenditures

Ashley Higginbotham lays out some warnings: "Some common mistakes we see is individuals trying to do their own SNT or getting a form online assuming that it would work for their needs. Eligibility for Medicaid is state-specific, so the SNT also needs to be state-specific. The language should be approved by the Social Security Administration to ensure that the language allows the special needs individual to remain eligible for their SSI, Medicaid and other government benefits while still receiving the benefits of the funds in the Trust.”

Regular communication between Trustees and benefits coordinators or special needs attorneys can help ensure compliance with changing regulations.

"The last thing that you want to see happen is that the SNT is done wrong—the funds are transferred into the SNT and then the special needs person loses their benefits. In those instances, the special needs individual will possibly be required to spend most, if not all, of the inheritance or the personal injury settlement before they can requalify for SSI or Medicaid,” says Ashley.

When do the benefits of a Special Needs Trust end?

Special Needs Trust benefits typically end in several situations:

• Death of the beneficiary: After the beneficiary passes away.
• Depletion of assets: If all Trust funds are spent, the Trust becomes inactive.
• Change in benefits eligibility: In rare cases, if the beneficiary no longer qualifies for or needs government benefits, the Trust may be modified or terminated.
• Legal termination date: Some Trusts include provisions for termination under specific circumstances.

"Generally, a SNT is only terminated once all the funds are used or the special needs person dies. If there are funds remaining in the SNT after the special needs beneficiary passes, those funds will be transferred to the secondary beneficiary named in the SNT—which is not usually a special needs beneficiary—or it can pass to the special needs beneficiary's heirs." — Ashley Higginbotham

When a Trust terminates, Trustees must follow specific legal procedures, including final accounting, tax filings, and proper distribution of any remaining assets.

Getting started with a Special Needs Trust

Creating an effective Special Needs Trust requires knowledge and careful planning. To get started:

"If you are considering setting up a SNT it is key to speak with a Special Needs Trust attorney in the State where you are wanting to maintain Medicaid eligibility." — Ashley Higginbotham

A Special Needs Trust is a crucial component of comprehensive care planning for individuals with disabilities. By providing financial security without compromising essential benefits, these Trusts help ensure your loved one will enjoy the best possible quality of life for years to come. Find out how LegalShield can help you with Trusts and other estate planning matters today.

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