Caring for a loved one with special needs requires careful financial planning. Many government assistance programs have strict income and asset limits, meaning that leaving money directly to a loved one can disqualify them from essential benefits.
Fortunately, special needs trusts (SNTs) provide a strategic way to offer financial support while preserving eligibility for critical programs.
Understand special needs trusts
A special needs trust (SNT) is a legal arrangement that holds and manages assets for an individual with a disability. The purpose is to enhance the beneficiary’s quality of life without interfering with government benefits like Supplemental Security Income (SSI) and Medicaid.
Unlike an outright gift or inheritance, assets in an SNT are not considered the beneficiary’s property and therefore do not count toward the strict financial thresholds that determine eligibility for these programs.
There are two primary types of SNTs:
First-party SNTs : First party trusts are funded with assets that belong to the person with special needs, such as an inheritance, legal settlement, or personal savings. Federal law requires that these trusts include a Medicaid payback provision, meaning that after the beneficiary's passing, any remaining funds must first be used to reimburse Medicaid for benefits received.
Third-party SNTs : Third-party trusts are established and funded by someone other than the beneficiary, such as parents or relatives.
Unlike first-party SNTs, these trusts are not subject to Medicaid payback requirements, making them an essential estate planning tool for families who want to provide long-term financial support without compromising their loved one’s eligibility for benefits.
A third-party SNT offers the most flexibility in estate planning, as it allows the person who created the trust to direct any remaining funds to other heirs or charitable causes.
How an SNT protects government benefits
Many government programs that provide medical care, housing assistance, and other essential services impose strict asset limits. As of 2025, SSI has a resource limit of just $2,000 for an individual and $3,000 for a married couple. If a person with a disability inherits money outright, they may be disqualified from these benefits until the inheritance is spent down to an allowable level.
An SNT allows assets to be used for supplemental expenses without affecting government benefit eligibility. Funds in an SNT can cover a wide range of expenses that improve the beneficiary's quality of life, including:
- Educational costs and job training
- Transportation, including accessible vehicles
- Assistive technology and medical equipment
- Therapies not covered by Medicaid
- Travel and recreation
- Home modifications for accessibility
Because the trust legally owns the assets rather than the beneficiary, they remain separate from eligibility calculations for needs-based government programs.
Choosing the right trustee
A trustee is responsible for managing and distributing the trust’s assets according to its terms. Selecting the right trustee is crucial, as improper trust administration can jeopardize the beneficiary’s benefits.
A trustee must:
- Ensure distributions comply with SSI, Medicaid, and other benefit regulations
- Pay for allowable expenses directly rather than giving cash to the beneficiary
- Keep accurate financial records and file any required tax returns
Options for trustees include:
- Family members : Parents or siblings often serve as trustees, but this role requires an in-depth understanding of benefit rules and financial management.
- Professional trustees : A trust company, financial institution, or attorney experienced in special needs planning can provide oversight and ensure compliance with complex regulations.
- Co-trustee arrangements : Some families opt for a combination, with a family member serving alongside a professional trustee to balance personal insight with professional expertise.
Choosing an inexperienced trustee can lead to improper distributions, mismanagement of funds, and even legal challenges. If distributions are made incorrectly—like giving cash directly to the beneficiary—it can result in a temporary or permanent loss of benefits.
Funding a special needs trust
Deciding how to fund an SNT is an essential step in the planning process. Common funding sources include:
Life insurance : Many families use a life insurance policy to ensure resources are available after parents or caregivers pass away. A second-to-die life insurance policy (which pays out after both parents pass) is a common choice for funding a third-party SNT.
Cash and investments : Savings accounts, stocks, bonds, and other investment assets can be transferred into the trust.
Real estate: If properly structured, a home or other property can be placed in an SNT for the beneficiary’s use without jeopardizing benefits.
However, Medicaid eligibility rules regarding homeownership vary by state.
For families with substantial assets, coordinating SNT funding with broader estate planning strategies is critical. A financial advisor or estate planning attorney can help ensure the trust is properly structured to avoid unintended tax consequences.
Common mistakes
Planning for a loved one with special needs is complex, and certain mistakes can have significant consequences.
Leaving assets directly to the beneficiary : Instead of placing funds in an SNT, some families name the person with a disability as a direct heir. This can cause the loss of essential benefits until the funds are spent down.
Failing to update estate planning documents : Wills, beneficiary designations, and financial plans should align with the trust. For example, well-meaning grandparents might leave money to a disabled grandchild outside the SNT, inadvertently causing disqualification from benefits.
Choosing the wrong trustee :A trustee unfamiliar with benefit rules may make improper distributions, triggering loss of government aid.
Improperly funding the trust : Families sometimes forget to formally fund the SNT after establishing it. Ensuring that assets are correctly titled in the trust’s name is crucial for proper execution.
Not planning for successor trustees: If a parent or primary trustee passes away, the trust must name a successor trustee to continue managing assets. Failing to do so can result in legal complications.
Final thoughts
A properly structured special needs trust provides long-term financial security for a loved one with a disability while preserving access to essential government programs. By understanding the different types of trusts, selecting the right trustee, and funding the trust strategically, you can create a solid plan that enhances your loved one’s quality of life.
