A special needs trust (SNT) lets people with disabilities have access to money without losing SSI or Medicaid. Here's how these important legal tools work.
In this article, we'll cover:
- What a special needs trust is
- Types of special needs trusts
- How they protect benefits
- Setting up a special needs trust
1. What a Special Needs Trust Is
The basics:
- Legal trust holding assets for someone with disabilities
- Assets don't count for SSI/Medicaid
- Managed by a trustee
- Supplements rather than replaces benefits
Why they exist:
- SSI has strict resource limits
- Direct gifts/inheritances can disqualify
- SNTs provide a solution
- Preserve eligibility while improving quality of life
How they work:
- Assets go into trust
- Trustee manages and distributes
- Beneficiary (person with disability) can't directly access
- Used for supplemental needs not covered by benefits
What they pay for:
- Things SSI doesn't cover
- Entertainment and recreation
- Travel
- Education
- Technology
- Companionship services
- Quality of life improvements
2. Types of Special Needs Trusts
First-party (self-settled) SNT:
- Funded with beneficiary's own assets
- From inheritance, lawsuit settlement, etc.
- Requires Medicaid payback at death
- Age requirements (usually established before 65)
Third-party SNT:
- Funded by someone else
- Parents, grandparents, other family
- No Medicaid payback required
- Can be in will or created during life
Pooled trusts:
- Managed by nonprofit organizations
- Many beneficiaries' funds pooled together
- Individual accounts within pool
- Lower setup and management costs
Key differences:
| Feature | First-Party | Third-Party | Pooled | |---------|-------------|-------------|--------| | Who funds | Beneficiary | Others | Either | | Medicaid payback | Yes | No | Sometimes | | Setup cost | Higher | Higher | Lower | | Management | Individual trustee | Individual trustee | Nonprofit |
3. How They Protect Benefits
Why assets in SNT don't count:
- Beneficiary doesn't control the trust
- Trustee has discretion over distributions
- Funds are for supplemental needs only
- Legal structure exempts from SSI counting
Rules for distributions:
- Must be for supplemental needs
- Can't be for food or shelter (or reduces SSI)
- Trustee pays directly for items/services
- Cash to beneficiary can cause problems
What "supplemental" means:
- Things government benefits don't provide
- Above and beyond basic needs
- Improves quality of life
- Not regular living expenses
Housing payments:
- Can reduce SSI if trust pays
- But may still be worth it
- Calculation is complex
- Get professional advice
Important: How the trust pays matters. Direct payment for items is better than giving cash to the beneficiary.
4. Setting Up a Special Needs Trust
Do you need one?
- If expecting inheritance or settlement
- If family wants to leave you money
- If you have assets above SSI limits
- If you want to preserve eligibility
For a first-party trust:
- Must be established by parent, grandparent, guardian, or court
- For someone under 65 with disabilities
- Must include Medicaid payback provision
- Requires legal help
For a third-party trust:
- Can be established by anyone except beneficiary
- No age restrictions
- More flexible terms
- Often part of estate planning
Choosing a trustee:
- Individual (family member, friend)
- Professional (bank, trust company)
- Nonprofit organization
- Consider: reliability, financial savvy, relationship
Costs:
- Attorney fees: $2,000-$5,000+ typically
- Ongoing trustee fees may apply
- Tax preparation
- Pooled trusts often cheaper to join
Finding help:
- Special needs planning attorney
- Elder law attorneys
- Academy of Special Needs Planners
- State bar referral services
Using Trust Funds Wisely
Good uses:
- Vacations and entertainment
- Electronics and technology
- Education and training
- Therapy and treatments not covered by Medicaid
- Vehicle or transportation
Problematic uses:
- Cash directly to beneficiary
- Food and shelter (reduces SSI)
- Basic clothing
- Routine bills
Best practices:
- Trustee pays vendors directly
- Keeps detailed records
- Understands SSI rules
- Communicates with beneficiary
How Purple Helps
- Track SSI and other income
- Monitor resource limits
- Keep records of spending
- Complement your trust with easy banking
- Stay organized