A special needs trust is a legal tool designed to provide for the care and financial needs of individuals with disabilities without compromising their eligibility for state and federal government benefits. Eligibility criteria for these benefits often feature strict income and asset limits, and receiving a large sum of money, such as an inheritance or a legal settlement, can disqualify a beneficiary from receiving these essential resources. A special needs trust allows assets to be held for the benefit of a person with disabilities while preserving their access to public assistance.
A special needs trust is created by a third party, such as a parent, grandparent or legal guardian, for the benefit of a person with disabilities. The trust holds assets and is managed by a trustee. The trustee is responsible for distributing funds according to the terms of the trust and in a way that does not interfere with the beneficiary’s government benefits.
The funds in the trust can be used to pay for supplemental needs, which are expenses not covered by government benefits. This can include things like medical treatments, therapy, education, transportation, personal care, recreation and other quality-of-life improvements that SSI or Medicaid does not typically cover. However, it is important that the funds are not used for food or shelter, as this could affect SSI benefits.
Types of special needs trusts
There are generally two types of trusts that caring people opt to set up on behalf of their loved ones:
- First-Party Special Needs Trust: This type is funded with the assets of the person with disabilities, often from a personal injury settlement, inheritance or other financial windfall. A key feature of a first-party trust is the Medicaid payback requirement, meaning that after the beneficiary’s death, any remaining assets in the trust must be used to reimburse the state for Medicaid benefits received.
- Third-Party Special Needs Trust: This type is funded by someone other than the beneficiary, such as a parent or grandparent. Importantly, third-party trusts do not have a Medicaid payback provision, meaning that when the beneficiary passes away, the remaining funds can go to other beneficiaries.
If you’re estate planning, keep in mind that without a special needs trust, a well-meaning inheritance or gift could unintentionally disqualify a person with disabilities from essential government benefits.
