Introduction
A special needs trust helps protect money for a person with disabilities while keeping their eligibility for government benefits. When to recommend a special needs trust depends on the client’s needs, the size and source of funds, and the benefits they receive. This article explains what a special needs trust is, the difference between first-party and third-party trusts, when you should use one, when you might not need one, and practical next steps for attorneys and plaintiffs.
What is a Special Needs Trust?
A special needs trust is a legal tool. It holds money or property for a person with a disability. The trust pays for extras that government benefits do not cover. These extras can include therapy, education, transportation, vacations, technology, or a caregiver. The trust is managed by a trustee. The trustee makes spending decisions to help the beneficiary without causing a loss of important benefits like Supplemental Security Income (SSI) or Medicaid.
The main goal is to let the beneficiary enjoy a better quality of life without losing access to means-tested benefits. Special needs trusts have rules. The trustee must spend trust funds in ways that do not count as “countable resources” for SSI or Medicaid. That usually means paying for goods and services that help but are not cash handed directly to the beneficiary.
First-Party vs. Third-Party Special Needs Trust
First-party and third-party special needs trusts are different in important ways.
- First-party special needs trusts: These are funded with the disabled person’s own money. Common sources are accident settlements, personal injury awards, or inheritance left directly to the beneficiary. First-party trusts are often called “self-settled” trusts. Rules usually require that the trust include a payback clause. This means that after the beneficiary dies, any remaining funds may have to be used to repay the state for Medicaid costs. Because of payback rules, first-party trusts have strict drafting and funding requirements.
- Third-party special needs trusts: These are funded by someone else, like a parent, grandparent, or other family member. The funds do not belong to the beneficiary until placed into the trust. Third-party trusts usually do not require payback to the state. That makes them more flexible for leaving an inheritance. Families often use third-party trusts in estate plans to protect inheritances while preserving benefits.
Choosing the right type matters. Each has tax, benefits, and administrative differences. Attorneys should carefully match the trust type to the facts of the case and the beneficiary’s long-term needs.
When is a Special Needs Trust Appropriate to Use?
Special needs trusts are designed to protect a disabled client’s eligibility for SSI (Supplemental Security Income) and Medicaid benefits, addressing one of the most common questions we receive: how to protect settlement money. SSI and Medicaid—which generally go hand in hand—are needs-based, which means that they are based on a client's assets and income.
If SSI and Medicaid Eligibility Needs to Be Protected
If a client may receive a settlement that would put their assets over the eligibility limit for Medicaid (see our post covering the concern, 'Do you lose Medicaid if you get a settlement?') and SSI because of a settlement, then a special needs trust might be appropriate to use in their situation.
This is because once a client put their settlement money into the trust, it allows them to continue to receive SSI and Medicaid benefits. And, because the money inside the trust is not counted against them for eligibility purposes, the money inside the trust can be used for anything that the client may need, except for what SSI is already paying them for (i.e., food and shelter expenses; refer to our checklist of special needs trust spending rules for more).
If the Beneficiary Cannot Manage Their Own Finances
For clients who may have disabilities or those whose condition makes them unlikely to wisely manage their finances, a special needs trust might be a good option to consider. In a situation like this, a special needs trust can help the beneficiary spend their money wisely, especially when the trustee of the trust is experienced in handling the unique needs of those with disabilities.
If the Beneficiary Needs to be Protected From Predators
Another good use of special needs trust is to help protect a client with a disability that may be at risk of being victimized by predators. It is not uncommon for unscrupulous people to target and take advantage of people with disabilities. Special needs trusts can also help prevent unchecked spending because the beneficiary has no control over the funds of the trust—only the trustee does.
Situations Where a Special Needs Trust May Not Be Appropriate
Not every situation needs a special needs trust. Consider other options if any of these apply:
- The amount of money is small and will be spent quickly. If a settlement is so small that the money will be used for basic needs within a short time, it might not justify the cost and complexity of a special needs trust.
- The beneficiary does not receive means-tested benefits and has capacity to manage money. If the person does not rely on SSI, Medicaid, or other resource-based benefits, or if they can responsibly manage funds, a special needs trust may add unnecessary limits.
- An ABLE account would be better. ABLE accounts are tax-advantaged savings accounts for people who became disabled before age 26. They allow a person to save money without losing benefits. For smaller amounts and for those who qualify, an ABLE account may be simpler and cheaper than a special needs trust.
- The family wants funds to be freely used after the beneficiary’s death. If the donor wants remaining funds to pass to heirs without state payback, a third-party special needs trust can do that. But a first-party special needs trust will usually require payback. If a payback is unacceptable, look for other planning tools.
- The beneficiary will need cash distributions that cause benefit loss. If the beneficiary needs regular cash to count as income, using trust funds that way might jeopardize benefits. The trustee must be careful to spend trust funds on allowable items that supplement, not replace, benefit-covered basics.
Should I Establish a Special Needs Trust for My Client?
If you have a client who wants to protect their SSI and Medicaid eligibility when they receive a settlement, you might want to consider establishing a special needs trust for the client. Using a special needs trust is a great way to allow your disabled clients to protect their benefits — and all the funds inside the trust can be used to pay for supplemental needs or other items that could improve their quality of life.
If you have any questions about special needs trusts, we can help guide you through the whole process. Please use the button below to book a call. We’ll discuss the situation and explore whether using a special needs trust makes sense. If it is, Amicus can help you navigate trusts and asset management with expertise and personalized support.
Frequently Asked Questions (FAQs)
How Early Should a Special Needs Trust Be Created?
Create a trust as early as possible when you expect funds that could affect benefits. If a settlement is likely, draft the trust before the award is paid. This helps ensure proper funding and avoids benefit disruption. For estate planning, include a third-party special needs trust in the will or trust documents so funds pass directly into the special needs trust upon death.
Can a Special Needs Trust Be Added After a Will is Signed?
Yes. You can create a new special needs trust at any time. You can also amend estate planning documents to leave assets to an special needs trust. But timing matters: if funds are already paid to the beneficiary, you must ensure the trust will be recognized as protecting those funds. It is safer to create the trust before the funds are transferred.
Does A Special Needs Trust Affect Medicare Benefits?
Medicare eligibility is not based on assets, so an special needs trust generally does not affect Medicare Part A or B eligibility. However, Medicaid eligibility is means-tested and can be affected by resources. A properly drafted special needs trust protects Medicaid and SSI but does not change Medicare. Ask benefits counsel about any interaction with Medicare Savings Programs or state-specific rules.
Can Multiple Beneficiaries Be Named in One Special Needs Trust?
It depends. A third-party special needs trust can name multiple beneficiaries and divide funds among them. First-party special needs trusts are meant to benefit a single disabled individual and often have strict payback terms, so combining unrelated beneficiaries can create problems. Pooled trusts are another option where multiple beneficiaries’ funds are managed together but kept in separate accounts. Discuss the best structure with counsel to avoid conflicts and payback issues.
How Often Should a Special Needs Trust Be Reviewed?
Review an special needs trust at least once a year, and whenever circumstances change. Important triggers for review include:
- Changes in benefits rules or program limits.
- A major change in the beneficiary’s needs or living situation.
- New funds entering the trust or large expenditures.
- Changes in the trustee or caregiver.
- Frequent reviews keep the trust aligned with the beneficiary’s needs and current law.
Conclusion
Recommending a special needs trust depends on the client’s benefits, the source and size of funds, and the beneficiary’s ability to manage money. Special needs trusts are powerful tools to protect eligibility for SSI and Medicaid while improving quality of life. Use first-party trusts for funds that belong to the beneficiary and third-party trusts for family-funded planning. Consider ABLE accounts for smaller savings needs and pooled trusts in certain cases. Always coordinate with benefits counsel, choose a capable trustee, and review the trust regularly. If you work with clients who may receive settlements, inheritances, or other lump sums, considering a special needs Ttrust early can save benefits and provide long-term security for the beneficiary.
