If you're planning your estate and a child or family member has a disability, a standard inheritance may do more harm than good. Receiving assets directly could disqualify them from the Medicaid coverage and SSI payments they depend on. A special needs trust solves this.
The Problem: Asset Limits on Benefits
Many government benefits for people with disabilities — particularly Medicaid and Supplemental Security Income (SSI) — are means-tested. To qualify, the recipient must have assets below a certain threshold: typically $2,000 in countable assets for SSI.
When a person with disabilities receives a direct inheritance of, say, $50,000, they're typically required to spend down those assets below the limit before they can resume receiving benefits. This creates a painful situation: the inheritance, intended to help, instead disrupts the benefits the person depends on for medical care and income.
A special needs trust (SNT) allows the inheritance to be held for the beneficiary's benefit without counting toward those asset limits — so benefits continue uninterrupted and the inherited funds can be used to meaningfully supplement what benefits provide.
How a Special Needs Trust Works
- The trust is created by a parent, grandparent, or other third party who wants to leave assets for the person with disabilities
- Assets are transferred to the trust — through a will, a trust, beneficiary designation, or during lifetime
- A trustee manages the assets — this can be a family member, a professional trustee, or a trust company
- The trustee makes distributions for approved purposes that supplement (rather than replace) what government benefits provide
- The beneficiary does not own the assets — they have no legal access to or control over the trust funds; this is what keeps the assets from counting toward benefit limits
- At the beneficiary's death (for a third-party SNT), remaining assets can be distributed to other family members, a charity, or as specified in the trust document
What a Special Needs Trust Can Pay For
The trustee has significant flexibility, but must avoid distributions that substitute for what benefits provide — particularly food and shelter (which can trigger benefit reductions) and direct cash (which reduces SSI dollar-for-dollar).
Generally permissible (supplements what benefits provide)
- Recreation, entertainment, and leisure activities
- Personal care items and toiletries not covered by Medicaid
- Clothing and accessories
- Technology: computers, tablets, smartphones, communication devices
- Education and vocational training
- Transportation (car payments, Uber/Lyft, accessible vehicle modifications)
- Vacations and travel
- Hobbies and sports equipment
- Legal fees
- Home modifications for accessibility
- Therapy and services not covered by Medicaid
- Prepaid funeral arrangements
Generally problematic (can affect benefits)
- Cash directly to the beneficiary (reduces SSI dollar-for-dollar)
- Food (can trigger an "in-kind support and maintenance" reduction in SSI)
- Rent payments (same as food in most cases)
- Mortgage payments on a home the beneficiary owns
The rules here are complex and vary by state and benefit program. An experienced trustee — or a trustee who works regularly with a disability-specialty attorney — is essential.
Who Should Serve as Trustee
Choosing the right trustee is one of the most important decisions in setting up a special needs trust. The trustee must:
- Understand the rules around distributions and benefits (or work with professionals who do)
- Be available and committed to managing the trust over potentially decades
- Have the financial skills to manage trust assets responsibly
- Be someone the beneficiary can communicate with effectively
- Be someone who will continue to serve regardless of family changes
Options:
- A family member — Often chosen for closeness and availability, but may lack technical knowledge and may not be able to serve long-term
- A professional trustee or trust company — Has expertise but may be less personally connected to the beneficiary
- A pooled trust — A nonprofit organization that pools SNT assets from multiple beneficiaries for investment purposes while maintaining individual accounts; often used for smaller trusts where professional trustee fees would consume too large a proportion of assets
- Co-trustees — A family member and a professional trustee together; combines personal knowledge with technical expertise
Third-Party vs. First-Party Special Needs Trusts
Third-party SNT
Funded with assets belonging to someone other than the beneficiary — typically a parent or grandparent creating an estate plan. This is the standard tool in estate planning for families with a disabled member. Key advantage: at the beneficiary's death, remaining assets can be distributed to other family members or heirs without any Medicaid payback requirement.
First-party (self-settled) SNT
Funded with the beneficiary's own assets — typically proceeds of a personal injury settlement, an inheritance received without a trust in place, or assets the beneficiary already owns. This type of trust has a Medicaid payback provision: at the beneficiary's death, remaining assets must first be used to reimburse Medicaid before any remainder passes to heirs. These are used when the beneficiary already has assets that need to be protected, rather than as a planning tool for inheritance.
How to Include a Special Needs Trust in Your Estate Plan
- Work with an attorney who specializes in special needs planning. This is a specialized area of law; general estate planning attorneys may not have sufficient expertise. The Academy of Special Needs Planners (specialneedsanswers.com) maintains a directory.
- Decide what assets will fund the trust. Common sources: a specific bequest in your will, naming the SNT as beneficiary of life insurance or retirement accounts, or a separate living trust that pours into the SNT.
- Choose your trustee (and successor trustees). Think carefully about who will serve now and who will serve after they're unable to.
- Communicate with extended family. Well-meaning relatives who leave money directly to the person with disabilities — bypassing the SNT — can inadvertently disqualify them from benefits. Tell family members about the SNT and ask them to use it for any gifts or inheritance.
- Review regularly. Government benefit rules change. Review the trust terms and administration with an attorney every few years.
The ABLE Account: A Supplement
ABLE accounts (Achieving a Better Life Experience accounts) are a newer option that provides some of the tax-advantaged features of special needs trusts with much simpler administration. ABLE accounts allow eligible individuals with disabilities to save up to $18,000/year (2024) without affecting most government benefits. However, ABLE accounts have a $100,000 limit before affecting SSI, and are subject to Medicaid payback. They're best used as a supplement to (not replacement for) a special needs trust for larger inheritances.