Special Needs Planning

For many families, this planning becomes especially important after an inheritance, lawsuit settlement, or gift, because receiving assets directly can put benefits at risk. With the right trust structure, those funds can be used to improve quality of life without replacing benefits such as medical coverage or monthly assistance.

What Is a Special Needs Trust?

A special needs trust is a legal tool designed to preserve eligibility for needs-based public benefits while allowing assets to be used for the beneficiary’s supplemental needs. In general, the trust can pay for items and services that enhance the beneficiary’s life, such as clothing, transportation, recreation, and certain medical-related expenses.

The trust is meant to supplement, not supplant, public benefits. That means trust distributions should be planned carefully so they do not interfere with benefit eligibility or create unnecessary reductions in benefits.

How a Trust Helps

A special needs trust allows a trustee to make purchases for the beneficiary without placing assets directly in the beneficiary’s name. This structure can be especially helpful when the goal is to preserve benefits while still improving comfort, independence, and quality of life.

Typical allowable uses include medical-related expenses, transportation, clothing, education, recreation, and other supplemental goods or services. Because some items, especially food and shelter, can affect SSI differently, distributions should be reviewed carefully before they are made.

Protecting Public Benefits

Special needs planning is often appropriate when a person has a disability and receives, or may qualify for, means-tested public benefits. Common means-tested benefits in this area include Medicaid, SSI, Home and Community Based Services waiver programs, and other disability-related assistance programs. Medicare is often part of the picture as well, especially when a beneficiary is dually eligible for Medicare and Medicaid.

When Benefits Are at Risk

Benefits can be jeopardized if a disabled person has too many countable assets in their own name. For SSI, the long-standing federal resource limit for an individual is generally $2,000, though Medicaid rules can differ by state and program.

Benefits can also be disrupted when a person receives an inheritance or lawsuit settlement directly. In those cases, transferring the funds into an appropriately structured SNT may help preserve eligibility and protect access to ongoing services.

These programs can provide essential support for healthcare, long-term services, and daily living needs. Because eligibility rules differ by program and state, special needs planning should be tailored to the specific benefit the person receives. This kind of planning is also useful if a disabled person is likely to receive an inheritance, settlement proceeds, or other assets that would otherwise be counted for eligibility purposes.

Types of Special Needs Trusts

There are two broad categories of special needs trusts: first-party and third-party.

• First-party SNT: Funded with the disabled person’s own assets, such as settlement proceeds, an inheritance already received, or assets legally belonging to the beneficiary. A disabled person under 65 years of age, their parent, grandparent, legal guardian, or the court can establish these types of trusts. In general, any assets remaining after the disabled person passes away are subject to Medicaid payback rules — a “pay back” to the state up to the amount it paid for Medical Assistance on behalf of the disabled person.
• Third-party SNT: Funded with assets belonging to someone other than the beneficiary, usually a parent, grandparent, or other family member. Because the beneficiary never owned those assets, a properly drafted third-party SNT is generally not subject to Medicaid payback.