What Is a Special Needs Trust?

A special needs trust is a legal arrangement and fiduciary relationship that allows a physically or mentally disabled or chronically ill person to receive income without reducing their eligibility for the public assistance disability benefits provided by Social Security, Supplemental Security Income, Medicare or Medicaid. In a fiduciary relationship, a person or entity acts on behalf of another person or people to manage assets.

A special needs trust is a popular strategy for those who want to help someone in need without taking the risk that the person will lose their eligibility for programs that require their income or assets to remain below a certain limit.

Key Takeaways

  • A special needs trust is a legal arrangement that lets a physically or mentally ill person, or someone chronically disabled, have access to funding without potentially losing the benefits provided by public assistance programs.
  • This trust allows for the additional financial support of an individual with special needs, without risking bumping them out of contention for disability benefits.
  • Public assistance programs set up for people with special needs are predicated on certain income and asset restrictions; money put in the trust doesn't count toward the purpose of qualifying for public assistance.

How a Special Needs Trust Works

A special needs trust covers the percentage of a person's financial needs that are not covered by public assistance payments. The assets held in the trust do not count for the purposes of qualifying for public assistance, as long as they are not used for certain food or shelter expenditures. Proceeds from this type of trust are commonly used for medical expenses, payments for caretakers, transportation costs, and other permitted expenses.

The party who creates the trust will designate a trustee who will have control over the trust. This trustee will also oversee its management and the disbursement of funds. Assets originally belonging to the disabled individual that get placed into the trust may be subject to Medicaid's repayment rules, but assets provided by third parties such as parents are not. This type of trust is sometimes also called a "supplemental needs trust."

Special needs trusts are irrevocable—neither creditors nor the winner of a lawsuit can access funds designated for the beneficiary.

Benefits of a Special Needs Trust

Establishing a special needs trust can have benefits for both parties. The beneficiary has a way to receive financial support without putting their eligibility for income-restricted programs or services in jeopardy. Meanwhile, the person or party that creates the trust has some reassurance that the proceeds will go to expenses they stipulate.

When a third party puts money in a special needs trust, the party is assured that the money will be used for its intended purpose. For example, parents might put assets in a special needs trust to provide for their disabled daughter instead of giving that money to their son. Special needs trusts are irrevocable, and their assets cannot be seized by creditors or by the winner of a lawsuit.

It is important that the person who creates the trust or their legal representative word the terms of the trust documents very carefully to ensure its validity, and to confirm that the directives and purpose of the document are explicitly clear. The special needs trust must be established before the beneficiary turns 65.