Understanding a Special Needs Trust and Its Benefits

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 (SSI), or Medicaid.

A grantor creates a trust and a trustee oversees the disbursement of assets from the trust. A beneficiary is a person for whose benefit the trust is established. The trust will supplement the beneficiary’s government benefits but not replace them.

A special needs trust is a popular strategy for those who want to help someone in need without risking 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 provides access to funding to someone who is physically or mentally disabled or chronically ill.
  • This trust allows for the additional financial support of an individual without potentially jeopardizing the benefits provided by public assistance programs.
  • Public assistance programs like Social Security and Medicaid have certain income and asset restrictions and trust funding is not counted toward these qualifications.

How a Special Needs Trust Works

A special needs trust helps cover a person's financial needs that are not covered by public assistance payments. The assets held in the trust do not count to qualify for public assistance.

Proceeds from this type of trust are commonly used for medical expenses, payments for caretakers, and transportation costs. The party who creates the trust, the grantor, will designate a trustee who will have control over the trust. This trustee will also oversee its management and the disbursement of funds.

A third-party special needs trust, commonly called a supplemental needs trust, is funded with assets belonging to a person other than the beneficiary, and funds belonging to the beneficiary may not be used to fund the trust. Funding may come from gifts, an inheritance, and proceeds of life insurance policies. 

A self-funded or first-person special needs trust allows people with disabilities to place their own money into a special needs trust and still be eligible for certain benefits under SSI and Medicaid programs. These trusts only hold assets that belonged to the beneficiary with disabilities before the funds are placed into the trust.

Assets originally belonging to the disabled individual placed into the trust may be subject to Medicaid's repayment rules, but assets provided by third parties such as parents are not.

Special needs trusts are irrevocable and 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 receives needed financial support without putting their eligibility for income-restricted programs or services in jeopardy. The person or party that contributes to the trust is reassured that the proceeds will go to expenses they stipulate.

The person who creates the trust or their legal representative must define the terms of the trust documents very carefully to ensure their 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. Special needs trusts are irrevocable, and their assets cannot be seized by creditors or by the winner of a lawsuit.

When Do the Benefits of a Special Needs Trust End?

The trust ends upon the beneficiary’s death and the remainder beneficiaries are the individuals who will receive any remaining trust assets. In first-person or self-funded SNTs, the state’s Medicaid division is reimbursed for the services it provided to the beneficiary and if assets remain, they usually pass to the beneficiary’s estate. In third-party or supplemental SNTs, the grantor of the trust decides who the remainder beneficiaries are.

What Kind of Assistance Does a Special Needs Trust Benefit Provide?

The money in a special needs trust will not jeopardize a recipient's eligibility for public assistance funds if the trust money only covers financial needs that aren't covered by those government funds. The trust money cannot be used for food or housing expenditures, instead, it is used to pay caretakers, out-of-pocket medical expenses, and the cost of transportation.

Is a Special Needs Trust a Revocable Trust?

No, this type of trust is an irrevocable trust. That means it cannot be modified, amended, or terminated without permission from the grantor's beneficiaries. The assets in a special needs trust can't be seized by creditors or by someone who wins a lawsuit.

Article Sources
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  1. U.S. Social Security Administration. "SI 01120.203 Exceptions to Counting Trusts Established on or after January 1, 2000."

  2. Special Needs Alliance. "Your Special Needs Trust."

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